Many public companies have tried to use stock splits in order to create an incre
ID: 2584910 • Letter: M
Question
Many public companies have tried to use stock splits in order to create an increased demand for their stock from the average investor who may have been scared away by the current high trading price of one share of stock. The hope for the future is that, following a stock split, the demand will increase and eventually the stock price will rise and outperform the market as a whole. There are various studies and articles out there with different opinions on whether or not a stock split is good for the investor in the long term. Research some articles and at least one example of a company that had a stock split. Comment on:
1. What do the various studies say about the performance of the stock in the long term after a stock split?
2. Lowes company has had a stock split, analyze the stock price before the stock split, after the stock split and the current stock price as of today. Based on the average market increase over the years, what would you say about this company’s stock performance after the stock split?
Date
Action
Shares
Shares After
Split
Closing Price
Before Split
Oct
1961
Bought 100 Shares
100
-
-
April
1966
100% stock dividend
(2 for 1)
100
200
41.50
Nov
1969
Stock Split
(2 for 1)
200
400
69.50
Nov
1971
50% Dividend
(3 for 2)
400
600
71.25
July
1972
33 1/3% Dividend
(4 for 3)
600
800
82.00
June
1976
50% Dividend
(3 for 2)
800
1,200
40.50
Nov
1981
Stock Spilt
(3 for 2)
1,200
1,800
19.88
April
1983
Stock Split
(5 for 3)
1,800
3,000
40.25
June
1992
100% Dividend
(2 for 1)
3,000
6,000
39.25
April
1994
Stock Split
(2 for 1)
6,000
12,000
64.50
June
1998
Stock Split
(2 for 1)
12,000
24,000
83.69
June
2001
Stock Split
(2 for 1)
24,000
48,000
72.55
June
2006
Stock Split
(2 for 1)
48,000
96,000
60.67
3. Do you think stock splits are good for the investor? Do you think they ultimately result in better performance, worse performance or no difference in performance over the long term?
Date
Action
Shares
Shares After
Split
Closing Price
Before Split
Oct
1961
Bought 100 Shares
100
-
-
April
1966
100% stock dividend
(2 for 1)
100
200
41.50
Nov
1969
Stock Split
(2 for 1)
200
400
69.50
Nov
1971
50% Dividend
(3 for 2)
400
600
71.25
July
1972
33 1/3% Dividend
(4 for 3)
600
800
82.00
June
1976
50% Dividend
(3 for 2)
800
1,200
40.50
Nov
1981
Stock Spilt
(3 for 2)
1,200
1,800
19.88
April
1983
Stock Split
(5 for 3)
1,800
3,000
40.25
June
1992
100% Dividend
(2 for 1)
3,000
6,000
39.25
April
1994
Stock Split
(2 for 1)
6,000
12,000
64.50
June
1998
Stock Split
(2 for 1)
12,000
24,000
83.69
June
2001
Stock Split
(2 for 1)
24,000
48,000
72.55
June
2006
Stock Split
(2 for 1)
48,000
96,000
60.67
Explanation / Answer
1) A 1996 study by David Ikenberry of Rice University measured the short and long-term performance of stock splits. His research included all the 1,275 companies whose stock split 2-for-1 between 1975 and 1990. Mr. Ikenberry compared the split stocks to a control group of stocks for similar-sized companies in similar sectors that had not split. His results were startling. The split stock group performed 8% better than the control group after one year, and 16% better after three years. In August 2003 Mr.Ikenberry - now Chairman of the Finance Department at the University of Illinois at Urbana-Champaign - updated the stock split study. This time he looked at companies from 1990 to 1997. Using a similar methodology that included 2-for-1, 3-for-1 and 4-for-1 stock splits, he found the results were essentially the same. Shares of split stocks on average outperformed the market by 8% the following year and 12% over the next three years.
Example Company: Microsoft's first stock split, a 2-for-1 deal, was on September 18, 1987, 18 months and five days after the IPO. Trading at $114.50 per share prior to the split, the closing price on September 21, following the split, was $53.50 per share. The second stock split took place on April 12, 1990. The share price had increased to $120.75 and after the 2-for-1 split, traded at $60.75 per share. In just four years, the original value of one share had increased to four shares at three times the value, making an original $21.00 investment worth $243.00.
2)
Since 40 years i.e from 1966 to 2006 the investment value went up from 4,150 (100 Shares * 41.5) to 2,912,160 (96,000 shares * 30.34). It has given 70073% absolute return and 17.7% CAGR in the same period.
3) It is good for investors because, sstock splits are mainly carried out with the intention of increasing liquidity. Once liquidity increases, more buyers and sellers trade in the stock, which, in turn, results in better performance in long term.
Date Action Shares Shares After Split Closing Price Befor Split Closing Price After Split Formula Oct Bought 100 Shares 100 - - 1961 April 100% stock dividend 100 200 41.5 20.75 =41.5/2 1966 (2 for 1) Nov Stock Split 200 400 69.5 34.75 =69.5/2 1969 (2 for 1) Nov 50% Dividend 400 600 71.25 71.25 No Price Change do to Dividend Issue 1971 (3 for 2) July 33 1/3% Dividend 600 800 82 82.00 No Price Change do to Dividend Issue 1972 (4 for 3) June 50% Dividend 800 1,200 40.5 40.50 No Price Change do to Dividend Issue 1976 (3 for 2) Nov Stock Spilt 1,200 1,800 19.88 13.25 =19.88*(2/3) 1981 (3 for 2) April Stock Split 1,800 3,000 40.25 24.15 =40.25*(3/5) 1983 (5 for 3) June 100% Dividend 3,000 6,000 39.25 39.25 No Price Change do to Dividend Issue 1992 (2 for 1) April Stock Split 6,000 12,000 64.5 32.25 =64.5/2 1994 (2 for 1) June Stock Split 12,000 24,000 83.69 41.85 =83.69/2 1998 (2 for 1) June Stock Split 24,000 48,000 72.55 36.28 =72.55/2 2001 (2 for 1) June Stock Split 48,000 96,000 60.67 30.34 =60.67/2 2006 (2 for 1)Related Questions
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