Stock splits are one of the implements that corporations keep in their tool kits. Akin to dividends. Or buybacks. Only ... less so. Stock splits are ephemera, like dotting an "I" with a smiley face. They make the message seem a little more companionable, without changing the meaning of the words.
Corporate management has responded to this reality affirmatively. "There are a lot more companies comfortable with stock prices north of $100 a share than would have been the case 10 years ago," David Ikenberry of the Leeds School of Business at the University of Colorado Boulder, said in a recent interview. "And it's hard to see that that ground is shifting."
Stocks are like wine prices at a restaurant. Thirty dollar cabernets are just right when the customer is putting down a personal credit card. That $100 bottle is the province of corporate cards. So it is with stocks: cheap stocks appeal to individual investors, pricier ones -- approaching or eclipsing triple digits -- to institutional investors. And everybody knows that the playing field has tilted in favor of those institutional investors the last several years.
"Institutional investors are indifferent to stock splits," Scott Rostan, founder and CEO of Training the Street, a provider of training services for investment professionals. "From a pure finance perspective, stock splits don't do anything."
Nevertheless, Ikenberry's own research, dating to 2003, found that stocks that companies executing stock splits outperform the market by 8% in the year after the split is effected, and by 12% over a three year period.
What's this -- the power of positive thinking?
"While stock splits in themselves do not add economic value to a company, there are a few behavioral benefits that companies can obtain from stock splits," Prof. William Mahnic of the Department of Banking & Finance at Case Western Reserve University in Cleveland said recently.
The first is an improvement in liquidity. Cheaper stocks are more affordable for individual investors. In theory that translates into increased demand. Which, in turn, should drive price appreciation.
The second is the dog whistle effect: stock splits are management's way to signal to investors that fundamentals are robust, and confirm the rationale for investing in the company.
There's a certain - though utterly unfounded - feeling of accomplishment associated with the bigger share count associated with a post-split investment. "People rationalize that they own a larger number of shares so their shareholdings have increased, when, in fact, their percentage of ownership is exactly the same," Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa., said recently.
Investors also have a different sense of anticipation associated with lower priced stocks. "There's an illusion associated with higher dollar stocks," Ikenberry said. Somebody holding a $30 stock might have a higher expectation that the shares could climb to $60 than would be the case for someone with a $300 stock anticipating those shares getting to $600.
All this being said, it comes down to the reality that stock splits are essentially fairy dust. A little corporate legerdemain. "A company is worth what a company is worth," Rostan said. "And if a company announces a 2-for-1 split, the market cap is still the same."
Nevertheless, guessing what corporate entity is on the cusp of a stock split is a fun kind of Wall Street game of charades. We've crafted a roster of a handful of companies with a few characteristics--high prices (i.e., $100 minimum), household names (mostly), with a track record of stock splits in their heritage--and offer them here as ... let's call them candidates, rather than suggestions.