For anyone who enjoys the peculiar satisfaction that comes when one of your stock holdings splits in two, 2019 was bereft of joy. Just two Canadian companies completed stock splits last year, a drought made more severe by the fact that the S&P/TSX Composite Index surged 19 per cent.
Are stock splits becoming a relic as trading costs decline and big investors dominate the market?
When a company splits its stock, typically two-for-one, it doubles the number of outstanding shares and cuts the nominal price of the stock in half, leaving the total value of the outstanding shares unchanged.
Historically, this was a good thing. It made it easier for small investors to buy even lots of 100 shares. And, some investors saw stock splits as a sign of confidence from companies that good times will continue.
But despite a bull market that has lifted the TSX by 45 per cent over the past decade, splits have become a rarity. There have been just four splits a year over the past five years, on average, according to FactSet. That’s down from an average of 19 a year from 2003 to 2007, including a high of 33 splits in 2005.
Convenience-store operator Alimentation Couche-Tard Inc. and software company Enghouse Systems Ltd. were the sole splitters last year, according to FactSet.
Royal Bank of Canada, a core holding for many investors, illustrates the trend. The bank split its shares four times over the past 40 years – in 1981, 1990, 2000 and 2006 – essentially maintaining the share price in a range between $25 and $50.
The share price is now $107.06. But the bank’s chief executive officer, Dave McKay, appears to be in no rush to alter the nominal price.
“The history of stock splits certainly is that the lower the share price, the more active investor community you have. We’re not sure that that tenet holds into the future, given digitization of trading and the broadly held nature of our stock,” Mr. McKay said at the bank’s most recent annual general meeting, in April, 2019.
The trend away from splitting stocks is similar in the United States. The S&P 500 has increased 190 per cent over the past decade, but the number of stock splits has dwindled to a handful in recent years. As a result, the average share price is now US$144, up from a decades-long historical average of US$35 (without taking inflation into account).
Just one stock in the S&P 500 trades with a single-digit price, according to Bespoke Investment Group: Ford Motor Co.
USCF Advisers launched the Stock Split Index Fund in 2014, hoping to attract investors to a strategy of investing in U.S. companies whose stocks have recently split. In a sign of the times, though, the exchange-traded fund shut down in 2017.
Why is interest in stock splits fading?
The key reason has been percolating for years: Retail investors can now buy any number of shares for the same flat fee (usually about $10), which means that even a $1,000 stock isn’t out of reach. What’s more, the importance of retail investors – generally small, do-it-yourself investors as opposed to large institutions and professional money managers – is shrinking. In 1990, households controlled about 50 per cent of the U.S. equities market; today, they control just 34 per cent partly because of the rise of exchange-traded funds, according to Goldman Sachs.
Market meltdowns during the dot-com bust and the financial crisis of 2008 also appear to be playing a role. Companies may be less inclined to split their stocks out of fear that their timing could be off.
William Weld, Roni Michaely, Richard Thaler and Shlomo Benartzi explored the topic of stock splits in a paper published in the Journal of Economic Perspectives in 2009. Their take: Maintaining an average stock price of US$35 is nothing more than a tradition.
The tradition appears to be dying, leaving companies that do split their stocks as rare exceptions.
Brookfield Asset Management Inc. and its various publicly traded spinoffs tend to maintain share prices between $40 and $60, usually in an appeal to retail investors. Brookfield Infrastructure Partners LP (full disclosure: I own units) and Brookfield Renewable Partners LP announced that they will effectively split their units this year as part of a plan to create corporations in addition to partnerships.
Last September, Alimentation Couche-Tard split its stock two-for-one when it was trading for more than $80.
“With this split, the company aimed to ensure that the cost of its shares would not become prohibitive for retail investors, who represent a meaningful proportion of its investors, by making ACT’s shares more affordable,” a Couche-Tard spokesperson said in an e-mail last week.
Investors doubled their holdings, but the value remained the same.
David Berman