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Stock Splits: How You Can Benefit As An Investor

With awe, I’ve watched stocks soar to highs that were once deemed impossible by some market players. Companies whose share prices are well over $500 are those that may be considered ripe to split their stocks.

Stock splits can be advantageous to investors, as well as to companies.

In this piece, I will discuss these advantages, in terms of the pros and cons of stock splits. I’ll also provide you with five companies that I think should consider splitting their stocks.

 · Stock splits explained

Before we get into the nitty gritty details of profiting from stock splits, let’s make sure we clearly understand what stock splits entail. Simply put, stock splits entail a company’s board of directors voting to increase a company’s float, or outstanding shares, by issuing more of them to current shareholders. The shareholders may also vote to approve a stock split.

 

 

Investopedia gives this spot on example:

In a 2:1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2:1 split. (Investopedia.com)

The ratios can be of any structure, although the most common are 2:1, and 3:1. So in a 2:1 or 3:1 split, the shareholder will have two or three shares, respectively, for every share held earlier.

Back in 2010, the world’s most expensive stock, Berkshire Hathaway (NYSE: BRK-B), had a 50:1 stock split for its Class B shares. Back then, it was trading around $3,500. Those who got in on Warren Buffet’s company after the split were able to buy in for around $70 a share.

To put that in perspective, consider this. They were able to buy a share in the world’s most expensive stock to own for the same price as buying a share in Panera Bread (NYSE: PNRA) back then!

 · The makings of a good stock split

The most important thing you must look at if you are considering whether to buy in to a stock split is the company’s stock price. Companies whose stock prices have soared so high that they are out of reach for the normal investor, like the four-digit per share Berkshire Hathaway, splits are ideal.

When Netflix (NASDAQ: NFLX) split earlier this summer, it said in regulatory filings that by issuing new stock it would have better flexibility for dividends, equity financing, and acquisitions. So companies following this strategy should make for good choices.

 · What’s in a stock split for you

Just as the stock split will decrease the stock’s price, it can also boost the price. That’s due to investors who had not been able to afford the stock before the split anteing up for a piece of the pie. Observers also note that an increase may have been already anticipated by investors because a company’s share price has already been on a tear. The demand to own the stock may increase as believers cling to the notion that the price will continue to rise.

 

 

Because stock splits create a larger number of shareholders, there is a theory that a company could be protected from government regulations.

Also keep in mind that an increase in the size of the float could create more liquidity for the stock. Many observers believe this could ease trading and even cause thee bid-ask spread to narrow.

 · Stock split cons

Stock splits can be disappointing to say the least if the value of the company falls. If a company splits its stock and then the value of the company itself falls, the shares may fall below this requirement and be delisted from NASDAQ or the New York Stock Exchange.

Also, remember that a stock split does not directly affect the company’s value.

 · Stocks that should split

Now that we’ve gotten those nitty, gritty details out of the way, let’s look at five of the companies I think are ripe for splitting – their stocks.

 

Company Name Price p/share as of 8/7/15
AutoZone (NYSE: AZO) $704
NVR (NYSE: NVR) $1472
Chipotle (NYSE: CMG) $749
Priceline (NYSE: PCLN) $1317
Intuitive Surgical (NYSE: ISRG) $533

 

As one of the largest aftermarket, auto parts retailers, AutoZone has more than 5,000 retail stores. In 2010, the stock was trading at just about $47 a share. Now, five years later, it trades at $700, with few dips as it climbed.

NVR Inc. managed to survive the housing collapse of 2008, and continue to break new highs. In addition to building homes, the company also provides mortgages. NVR boasts building almost 365,000 houses in the U.S., and it shows no sign of slowing down.

I remain completely in awe of Chipotle. Who would have thought that a Mexican fast-food restaurant chain would demand a share price way above that of consumer household name McDonald! McDonald’s trades around $98 a share.


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Naysayers of Chipotle say that it is extremely overvalued. That makes for one of the cases for why it should split its stock.

Priceline also baffles me. It remained a strong choice among investors even when consumers traveled less during the economic slowdown. The “Priceline negotiator” seems to truly be paying off for the company.

Intuitive Surgical makes robotic surgical systems, and has seen its share price soar since it IPO’d in 2000. According to Zacks, over the course of July, the stock moved higher by almost 13%. It’s also moved above its 20-day single moving average. The stock is seen continuing to its run for a little longer by Zacks, which states, “this isn’t the top for the in-focus company.”

 





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