When a company splits its shares in two, the company’s overall value remains the same, but a shareholder will double the number of shares in their portfolio, and those shares will trade at half the previous price. For example, a person who holds one share of a company at $100 per share will now hold two shares at $50 apiece. Shares don’t always split in exactly two—in some cases, companies will perform a 3:1 split or divide shares even further. Let’s look at some familiar stocks that haven’t split, even as share prices grew. We’ll then examine the reasons why a company would choose to split its shares of stock or choose not to.
Stocks That Don’t Split
Here are a few names you might be familiar with that choose not to split their stock in recent years.
Booking Holdings (BKNG)
Formerly known as Priceline, this travel service company was trading above $2,000 per share in March 2021. This high price is at least in part due to a reverse stock split in 2003, in which shareholders received one share for every six they owned. The reverse stock split came after a major market downturn that slammed the company’s share prices. Thus, there may be some institutional wariness about splitting and allowing prices to get too low. There’s been no indication from management that a stock split will be happening anytime soon.
Netflix (NFLX)
From 2016 through early March 2021, Netflix stock prices have increased from less than $100 to more than $500. At that price, you may think Netflix may be due for a split. While Netflix may choose to split its stock again, the company is only seven years past its most recent stock split—a whopping 7-for-1 split in 2015.
Berkshire Hathaway (BRK)
Warren Buffett’s company is perhaps the best example of a company that rarely shows a desire to split its shares of stock. Since 2018, Class A shares have hardly dipped below $300,000 apiece. You read that right—a stock that trades well into six figures. However, while Class A shares trade for the price of a house in some markets, Class B shares are more available to everyday investors. In early April 2022, Class B shares were trading around roughly $350. Class B shares don’t have the same voting rights as Class A shares and were essentially created as a compromise between Buffett, who did not want to split shares, and investors, who wanted to be able to purchase shares at a reasonable price. The company split Class B shares 50-1 in 2010 but has never split Class A shares.
Why Split Stock Shares?
One of the main reasons a company might split its stock is to expand its shareholder base. A split will make shares more affordable for more people, and some companies prefer to avoid seeing their shares concentrated on a small group of people. When shares are spread among more people, an individual can sell most or all of their shares without it having a meaningful impact on the share price. More shares also allow for greater liquidity—shares become easier to buy and sell when there are more on the market. When shares become very expensive, the spread between the bid price and the ask price can be quite large, thus making trading stocks harder.
Why Wouldn’t a Company Split Its Stock?
A small study found that, on average, markets react positively to stock splits, but that doesn’t mean splits have a real impact on the intrinsic value of the company. Unless the stock is facing liquidity issues, there may not be any compelling reason for a company to split its stock. Some companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige. A company trading at $1,000 per share, for example, will be perceived as more valuable even though the firm’s market capitalization may be the same as a company whose shares trade at $50.
Potential Negative Impacts
In some cases, stock splits can have a negative effect. Smaller companies who split their stocks may have stock prices fall too low. If a stock split is combined with another financial event that further depresses prices, there are two major risks: a negative psychological impact on traders watching the price fall so rapidly and, in the worst-case scenarios, the stock price could fall below a stock exchange’s requirements for listing. The Nasdaq, for example, wants stocks on the exchange to cost at least $1. If a stock falls below that price and stays below $1 long enough, it may get delisted. After getting delisted, there could be liquidity issues, and brokerages could choose not to trade the stock anymore—not to mention any psychological issues traders may have with a stock losing its exchange status.
Decreasing Need for Stock Splits
In previous decades, it was impossible to become a shareholder of a company unless you obtained enough money to buy at least a single share. However, that’s no longer the case. There are many new trading platforms and services that allow investors to purchase fractional shares. Some traditional brokerages have also followed suit and begun allowing their retail investors to buy fractional shares. Another factor is the increasing popularity of mutual funds and exchange-traded funds (ETFs). These funds give investors exposure to stocks without necessarily owning full shares outright. This isn’t an accurate representation of how much the stock is worth since it was split and not the result of market conditions. This, combined with added risks that come with low-priced stocks, impacts the volatility of the stock, making it a riskier investment compared to when the stock price was simply high. The payment date comes after the record date, and this is when those shareholders will be given their stock split shares. The ex-split date, also called the effective date, is when trading of these new shares can begin.
