Do Stock Splits Matter?

stock-splits“A stock split does nothing.”
-Tim Cook, Apple CEO, February 2012
Two years later, Mr. Cook has changed his tune.
Apple (Nasdaq: AAPL) announced a 7-to-1 stock split during its fiscal second-quarter earnings report on Tuesday, with the split scheduled for early June.  At the current price, the split would reduce the share price from $565 to roughly $80. The intent, in Cook’s words, is to make the stock “more accessible” to the average investor. The early returns have been impressive, with Apple shares shooting up 8% yesterday. That’s not exactly the “nothing” Cook talked about two years ago.
But how long will it last? How much traction will Apple get over the long term from cutting its share price in sevenths? To know what to expect, let’s look at the effect recent stock splits had on shares of several high-profile companies.

Coca-Cola (NYSE: KO) Stock Split

Split Date: April 12, 2012
Return Since: +12.8%
No long-term boost here. Coca-Cola shares have lagged these last two years, managing barely a third of the 35% gains in the S&P 500. But the short-term benefit after the 2-for-1 stock split was indeed profound – Coca-Cola shares gained 12% in the three months that followed. In the nearly two years since, however, the stock is essentially flat. (NYSE: CRM) Stock Split

Split Date: April 18, 2013
Return Since: +35.6%
Unlike Coca-Cola, shares of this cloud-computing giant have performed quite well since splitting its stock 4-for-1 a year ago. The 35.6% return blows away the 21.6% return in the S&P 500. In the month after the split, Salesforce shares shot up 15% … before promptly pulling back to a six-month low. The stock has performed quite well since then. But it’s unclear how much the lower share price had to do with the bounce-back.

MasterCard (NYSE: MA) Stock Split

Split Date: Dec. 11, 2013
Return Since: -7.2%
MasterCard’s unusual 10-for-1 stock split caused quite a stir just before the holidays. And investors took notice. Shares vaulted 7% in the month that followed. Since then, the stock has plummeted. The shine of an $80 share price instead of an $800 one eventually wore off. It seems that a month is all it takes.
It’s clear that stock splits can give a stock a nice short-term boost … but not always. Coca-Cola, and MasterCard all rose more than 7% in the months that followed their splits. On the other hand, Google (Nasdaq: GOOG) shares have actually slipped 6% in the month since the search-engine giant divided its $1,120 stock in two.
As for the long-term impact a stock split has on shares … Cook may have had it right the first time. Splits did “nothing” to Coca-Cola, or MasterCard shares over the “long” haul – meaning longer than just a couple months. Even Salesforce’s big move didn’t come until after the stock hit a six-month low. I doubt investors suddenly woke up three months after the split and decided Salesforce shares were suddenly worth buying because the stock was being sold at a quarter of the previous share price.
He may have been talking out of both sides of his mouth. But Tim Cook was actually right in both cases. Stock splits can make a stock such as Apple or Google “more accessible” to the average individual investor only looking to spend a few thousand bucks. But in the long term, stock splits “do nothing” to change the way Wall Street views a stock.
Earnings growth, strong products and solid management decisions are the things that really matter. Stock splits are little more than a gimmick that has but a temporary effect on a company’s share price.

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