Posted by: Howard Silverblatt on June 7, 2010
Today, June 7th, the holders of Express Scripts will get something no other S&P 500 issue has gotten since the holders of AmerisourceBergen Corp got it on June 16, 2009; and tomorrow so will General Mills. The “it” is shares, as in a stock split. Ten years ago there were 83 stock splits, last year there was just one, and tomorrow will be the first one this year (a small note below on reverses and stock dividends). Traditionally splits were used to keep stocks in a price range. The concern was that if prices were too high, investors, especially individuals, would not buy them. So, as a stock price went up, to say 150% or 200% of its acceptable level, speculation would start on a split, causing the stock price to raise more. After another 10%-20% gain, enough to cushion the stock incase it got caught in a down draft after the split, the issue would split. Decades ago (I’m old), there were services which charged a fee to alert you via a beeper (I hope you remember what a beeper is) when a split was announced so you could buy the stock (no one cared what the issue was), make a short-term profit, and move on - ah, life was good, and easy (not really).
That was then. Now splits are out of fashion. Besides stocks not being high in price (unless you compare it to the Mar,’09 lows), splits are expensive, and the cost of maintaining odd-lots is equally as high. Secondly, companies are not as scared about high prices. The $37.40 average price 30 years ago when the S&P 500 was at 135.76 compares to the $42.11 average of today with the index at 1067. The logic for splits is gone, there is no need for them and in the current cost conscious environment there is no room for them. So, why do I think they stock splits will return? The logic of psychology. I think, which is short hand for saying I have absolutely no evidence or facts to back up my opinion, that investors like splits: more shares; a belief that it proves the stock has done well; and a belief that management thinks the stock will continue to do well. All illogical, non-professional, and on par with not selling a stock that is up 90% just because you want to say it doubled - but that’s what investor psychology is about. No big pressing investment insight here, a few chart below (and attached in the file), and a note of an unusual event in the current market trend, maybe.
Reverses and Stock Dividends:
Stock dividends were never very popular, but there were some (it was more popular for Canadian issues). The company would issue a 2% stock dividend, and the price would be unaffected (of course we were in eights back then). Stock dividends have been rare as of late. In 2008 we saw First Horizon decrease its dividend from $1.80 to $0.80 to Nil, and initiate a quarterly stock dividend, which it is still paying. In 2009, Marriott suspended its dividend of $0.35, and started paying in shares, and this year reinstated the cash payment at $0.16. Reverses typically are the result of stocks trading too low (which can be cause an exchange listing difficulty, although current rules have been relaxed), and management wanting to get the prices back up (again psychology). Recent examples include E Trade, which did a 1-for-10 REVERSE (my editors always made me capitalize reverse to emphasize it, you getting this Ron- editor, Stock Guide, a few decades ago), and AIG’s 1-for-20 Reverse.