Two high profile companies —Apple and Tesla— have announced stock splits in the last few weeks, which makes it a great time to discuss what’s involved when a company announces a stock split.
The Securities and Exchange Commission says, “Companies often split shares of stock to try to make them more affordable to individual investors. Unlike an issuance of new shares, a stock split does not dilute the ownership interest of existing shareholders.”
Apple announced that the 4-for-1 split of its common stock and trading is expected to begin on a split-adjusted basis on August 31. Tesla plans a 5-for-1 split, which is also scheduled to begin trading on a split-adjusted basis on August 31.
When a company declares a stock split, a shareholder’s total market value will remain the same. For example, say you own 100 shares of a company that trades at $200 per share. If the company declares a 2 for 1 stock split you will now own a total of 200 shares at $100 per share immediately after the split. If the company pays a dividend, your dividends paid per share will also fall appropriately.
There is also a “reverse stock split.” If a company declares a reverse split, it plans to reduce the number of outstanding shares, such as a 1 for 2 split. A reverse stock split tends to occur with companies that believe their stock price is too low to attract investors.
Will more companies consider a stock split? That’s hard to say. The act of splitting creates no true additional value, but for Apple and Tesla, their share price took off.
Some companies prefer a higher stock price. Perhaps the best known high priced stock is Warren Buffet’s Berkshire Hathaway. It’ class A share, trades for more than $300,000!
In the days leading up to a stock split, you’re likely to hear a lot of opinions about the companies. Over the years we have found it’s best to ignore the chatter and stay with an investment approach that’s in line with your personal situation!
