Where Are the Stock Splits?

11/17/2010 3:22 pm EST

Focus: MARKETS

John Heinzl

Reporter and Columnist, GlobeInvestor.com

Expect more stock splits in the coming months, says John Heinzl, reporter and columnist for GlobeInvestor.com.

Companies used to split their stocks all the time, but I haven’t seen many splits lately. What’s going on?—G.M.

You’re correct that stock splits have all but dried up. That’s because share prices haven’t been high enough to justify a split. But that may be about to change.

This month, Magna International Inc. announced a two-for-one split, and it could soon have company if markets keep rising.

“As Canadian stocks start to track toward the higher double digits, the $70, $80 or $90 range, you’ll likely see stock splits,” said Tony Demarin, president of BCV Asset Management in Winnipeg.

The main reason companies split their stock is to make the price more palatable for retail investors. If the price rises too high, the thinking goes, smaller investors won’t be able to afford a board lot of 100 shares. A company may also authorize a split to increase the liquidity of its stock.

By itself, a split doesn’t make the investor any richer. Instead of owning 100 shares of a stock trading at $80, for example, the investor now holds 200 shares worth $40 each.

However, research has shown that stocks that split outperform the market. A 1996 study by David Ikenberry of Rice University, for instance, found that stocks that split gained eight percentage points more than non-splitters in the year following the announcement.

Why would this be the case if stock splits don’t add economic value? There are several theories:

  • The lower price attracts more investors, who push up the value of the shares.

  • Split announcements are often accompanied by dividend increases and other positive news.

  • The pool of companies that split their stock tend to have certain attributes in common—fast growth, rising profitability—that account for the subsequent increase in their share prices.

“A history of repeated stock splits does indicate that the company does have very sustainable long-term earnings growth,” said Elvis Picardo, vice-president of research with Global Securities in Vancouver.

Not all companies split their shares. Google doesn’t bother, and that doesn’t seem to have held it back.

Wondering when your company will split its shares? You can enter a company name at splitpredicting.com and the Web site will provide an estimated split price based on historical data. It’s a US Web site, but it works for some interlisted Canadian stocks as well, including some of the big banks.

According to Colgate-Palmolive’s Web site, the company has raised its dividend annually for the past 47 years. Why is it not counted as a US Dividend Aristocrat? - C.V.

It took some digging, but with the help of index guru Howard Silverblatt at Standard & Poor’s in New York, we think we’ve found the answer.

First, some background. To be included in S&P’s Dividend Aristocrats index, a company must have paid higher dividends for at least 25 consecutive years.

Also, it’s important to note that S&P measures total dividends paid in a calendar year, not whether the company actually increased its quarterly dividend during the year. Confused? Consider an example. Company XYZ pays quarterly dividends of 25 cents, 25 cents, 25 cents and 30 cents in one year, for a total of $1.05. The next year it continues paying 30 cents quarterly, for a total of $1.20. So, even though it didn’t increase its quarterly dividend in the second year, the annual payment rose.

By the same token, if a company’s total payments fall from one year to the next, it would be disqualified as an Aristocrat. This is true even if the previous year’s payment was inflated by a one-time special dividend or distribution.

Turns out this is exactly what happened to Colgate-Palmolive.

Back in 1988, the company paid four quarterly cash dividends of 4.625 cents (all figures adjusted for stock splits). However, under a shareholder rights plan, it also distributed one preference share purchase right valued at 1.25 cents. Total payments during 1988 were therefore 19.75 cents (the four quarterly cash payments plus the one-time distribution).

The following year, Colgate-Palmolive continued paying a dividend of 4.625 cents for the first three quarters, then raised its quarterly dividend to 5.625 cents, for a total of 19.5 cents. However, because there was no one-time distribution that year, the total in 1989 was slightly lower than 1988.
In other words, Colgate-Palmolive was booted out of the Dividend Aristocrats index on a technicality.

This shouldn’t tarnish Colgate-Palmolive’s otherwise strong record of dividend growth. Since it was removed from the index, it has paid higher dividends every year. It’s also one of the oldest dividend payers around, with an uninterrupted record of payments going back to 1895.

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