The Case for a Google Split
With shares of Google (GOOG) setting yet another all-time high and poised to break through the $500-a-share frontier, is it finally time for the search giant to split its stock?
While there seems to be speculation about a split every time the company surpasses another $100 in its stock price -- remember the sticker-shock talk when it crossed the $200 mark almost two years ago? -- the logic now is more compelling than ever.
It might appear that the difference between holding one share that costs $500 or 10 shares that cost $50 each is trivial. But for individual investors, whom Google explicitly sought out in its unusual 2004 auction IPO because of the everyperson's tendency to look at the long term, it's not.
On the psychological side, Google's increasingly stratospheric stock price makes it less approachable to individual investors. This effect will only become stronger, as a growing number of analysts predict that the stock will hit $600.But there are also practical issues. Suppose someone decides to invest $1,200 in Google. At current prices, that gets you two shares. The remainder of the money will have to find a new home, and this -- when added up -- can soften demand. All of this means that Google's stock could be trading for more if the company initiated a split -- and perhaps a good deal more, if history is any guide. Research shows that the effect of a stock split is a gain in value of 9% over a year, says David Ikenberry, a professor of finance and chairman of the department of finance at the University of Illinois College of Business.
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