Stock splitting may be a great way to bring ballooning share prices down safely-giving shareholders the opportunity to double or triple the value of their stock, should the company continue performing-but not everyone thinks it’s all that it’s cracked up to be. And sometimes, it can be downright risky business.
Hooper Holmes, a Basking Ridge, NJ-based provider of health information, split its stock 2-for-1 in the first quarter of 2000, its third split in as many years, after running up revenues of $285 million in 1999. At the time of the split, its stock was trading in the $35 range.
James McNamee, the company’s chairman, president, and CEO, has seen stock splitting as a key finance maneuver. “It is a strategy of ours to improve the visibility of the company and increase float and liquidity. If you can match those changes with consistent performance, then it is a solid tool for providing shareholder return.”
As a bonus, the company’s stock sometimes enjoys a short-term boost on a split. “As there are more shares outstanding and more liquidity, the trading itself loosens,” he says. “If the company performs the way it is supposed to, that should bode well in terms of increasing shareholder value. It has proven so in previous splits.”
But not this year. The company hit an earnings bump and McNamee admits Hooper Holmes shareholders are not getting the full return on the split. And they’re not the only ones.
Since 1996, when there were 643 stock splits, totals have trended downward, reports Thomson Financial Securities Data. Last year, there were 460 splits. And this year’s stock market turmoil seemed to inspire companies to reduce share price even more often; through the first half of 2000, 327 splits were reported.
Pete Barry, who heads up StockSplits.com, a Web site tracking stock splits, takes a trader’s perspective.Companies might want to have more shares available for something like an acquisition, he says, but they don’t consider market needs. “Long-term investors are more interested in stocks that can go from $30 to $100,” says Barry. “Stocks that wait until they hit the century mark before splitting will run up. If you have a stock at $35 and announce a 2-for-1 split, it’s the kiss of death. The stock’s at $15-nobody cares.”
Warren, NJ-based biopharmaceutical company Celgene split 3-for-1 in the first quarter, but waited until its share price hit the century range. “Clearly, a 2-for-1 split is more conventional,” says John Jackson, Celgene’s CEO, “but we were comfortable there would be a steady, positive news flow over the coming period to justify the 3-for-1 split. It was the right strategy, not only because we are optimistic about growth prospects but it enhances accessibility to the stock.”
Accessibility was very important because over the past year, the percentage of institutional holders increased significantly. The stock, as Jackson observes, became too expensive for the retail market and “we wanted to make the stock available to the widest range of investors.”
While some academics call a stock split a non-event, Roger Perry, CEO of Rightline.net, an online newsletter covering splits, says that’s only true if you look at it as one moment in time. “But it’s more of a process than an event. Companies for which high share price is driven by performance will split stocks. Since price moves as a function of demand, the stock split announcement can cause a stock price to rise as there is a psychological increase in demand for shares.”
Michael Ruettgers, CEO of Hopkinton, MA-based EMC would agree. The $6.7 billion maker of mainframe disk memory was the leading S&P 500 stock on the NYSE in the 1990s with nearly 81,000 percent growth. The company split its stock five times during the decade and again in June 2000.
“If you look at EMC’s market opportunity and couple it with a track record for strong results, you can see why investors continue to believe that, even with a $175 billion market cap, EMC is in a growth cycle, relatively small to its market opportunity, and continues to be a growth stock,” says Ruettgers. “By splitting the stock, we believe we can attract a broader group of investors.” Retail investors now hold approximately 30 percent of EMC’s shares, up from 23 percent 18 months ago.
Despite a volatile market during the first half of 2000, Ruettgers felt that a stock split would create value for existing investors, while also making the stock more attractive to new investors. He appears to have guessed right. EMC’s stock price increased since the split took affect on June 2nd and was up 25 percent just 45 days later. Just more proof for stock split proponents that, when done right by a well-performing company, it can be an ideal way to put cash in the coffers.