The secret behind stock splits

For some stocks, when the price appreciates to a certain target price, the management may decide to split the existing share to smaller shares. This is to improve liquidity. Since going public in 1965, McDonald’s has paid twelve stock splits.

Similarly, when the share price is too low, the management may decide not consolidate the shares in a reverse stock split. SGX listed Aims Amp Industrial REIT recently did a 5 to 1 reverse stock split to consolidate its share so that it looks more appealing at $1 than at $0.20 to investors.

So what is the main benefit of stock split? from the underline words, you will be able to tell that the benefit is mainly psychology. The value of the shares you held doesn’t change, it is just the size of the number of shares.

It also greatly distorts a stock investors research when you think whether companies like McDonald and Singapore Press Holdings were good long term investments since their stock price look as if it has gone nowhere.

However, an investment of $2,250 in 100 shares of McDonalds at 1965, had grown to 74,360 shares worth over $5.7million as of year-end market close on December 31, 2010. So did SPH which split a few time, else it would have been a $16 to $20 stock.

A real life example was recently encountered over at Seeking Alpha where a retail investor shares what her parent actually did and how, if you hold a good stock, the stock splits are pretty amazing:

Greyledge Gal:

I’m 49 years old. For my 10th birthday In 1972, my father put $14,400 into XOM, purchasing 200 shares. I have never touched this investment nor have I plowed back the dividends into XOM or purchased any additional shares.

Due SOLELY to stock splits, 39 years later, that 200 shares has turned into 6,400 shares. I have no insider knowledge but XOM hasn’t split for over 10 years and it is probably ripe to do so. Normally, splits have happened when the stock is selling from $70-$80/sh.

Who knows what the future holds and your investment might turn out quite differently than mine has; however, I don’t see the world quitting on oil anytime soon and XOM is also positioned well in shale and natural gas. I doubt you could go wrong even with the lower yield IF and ONLY IF you are going to make this a long term, lifetime, investment. Yes, it takes a lot of intestinal fortitude (like when IBM went to heck about 20 years ago, it took a lot not to sell but boy am I glad I didn’t!), but if you have the stomach for the roller coaster ride, investing in blue chip stocks like XOM, IBM, Chevron — another winner, MCD, etc., is the safest route for building retirement savings.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

  • Temperament

    Hi Dritzz,
    It’s very true if you buy & hold the “right” companies for 30 years or more, you may “retire” as a millionaire. Even “HP” can make me a millionaire but i bought it a bit too late(by six months – to a year). i still holding with “DRIP”. Maybe another 10 years time. By then my son may take over. Ha! Ha!

  • Drizzt

    Hi Temperament! how many stock splits have HP done through the time u held it?

  • Temperament

    i am too lazy to be exact. i think since 1980-1982. but i DRIP later. i know because HP used to have a record of their history of stock splits. So you can calculate why you are not a millionaire lol. i think the record should be still there.

  • Createwealth8888

    I am wondering when will Keppel Corp CEO be wiser enough to split its stock again. :-)

  • Drizzt

    Hi uncle CW, i think right now probably not. but if it appreciates they may in the future.

  • Paul

    I think apart from the ‘psychology’ reason, another reason why companies undertake a ‘reverse stock spilt’ or share consolidation is to reduce the volatility of the company’s market capitalisation. I recall that was the reason why Itech Group did a share consolidation.