The question of why companies engage in stock splits is one I’ve pondered for some time, and is one most financial advisors will say ultimately doesn’t matter from the perspective of the underlying business behind the stock split.
A stock split involves a company, which has typically seen its stock price appreciate considerably, exchange a certain number of shares for an increased amount, effectively giving an investor more shares for a company.
An example would be a 2:1 stock split in which an investor in Company A exchanges 100 shares of stock worth $100 each for 200 shares of stock worth $50 each. While this investor holds more shares, the price per share drops by the ratio of the split, making the investor’s net position from a dollar standpoint the same.
Canadian telecommunications giant Telus Corp. (TSX:T) recently announced mid-February the company would be carrying out a 2:1 stock split amid earnings that were neutral overall (met analyst estimates).
The company’s stock price has certainly performed well in recent years, but the question of why companies still split their shares today continues to boggle my mind.
Most investing platforms today do not require minimum purchase lots, as they used to, meaning most retail investors today (you and me) are, in most cases, able to buy single share allotments, or even partial share allotments, meaning stock splits simply don’t have the impact they used to, from a retail investing standpoint.
I’ve met some investors who legitimately do care about the number of shares they own of a specific company, so I suppose stock splits represent more of a psychological move by companies, looking to stoke investor sentiment.
But these really aren’t noteworthy events for me, and I generally ignore these news items as they come along.
Invest wisely, my friends.
