The First Cut: Recent Stock Splits

    The First Cut: Recent Stock Splits Splash image

    Stock splits are often announced with great fanfare and strong press coverage. A positive stock split partitions the outstanding shares of a corporation into a larger number of shares accompanied with a proportionate decrease in share price, without affecting the overall shareholders’ equity or the total market value. For example, if you own 100 shares of a company that trades at $90 a share and it declares a three-for-two stock split (a split ratio of 1.5), you will own a total of 150 shares at $60 a share after the split. If the company pays a dividend, the dividends paid per share will also fall proportionately.

    Why do companies split their shares—and why should you care? While stocks normally get a small boost from announcing a split, more importantly splits follow a period of strong price performance. Companies generally try to keep their stock price within a certain range. A stock split announcement represents a vote of confidence from the board of directors that acknowledges a company’s stock performance and signals the board feels that performance is going to continue.

    This issue’s First Cut seeks exchange-listed stocks that have undergone significant positive stock splits (a ratio of 1.5 or greater) in the second half of this year. The stocks are sorted by industry to highlight sector concentrations and patterns. The First Cut listing also includes: price performance over the last 13 and 52 weeks to judge short- and longer-term price strength; market cap as an indication of size; the price-earnings ratio to help assess how rich the stock is priced; and the historical earnings growth rate as a measure of the company performance that helped to drive the stock price up.

    Keep in mind that a stock split announcement is not a reason to buy a stock, but serves as a pointer to recently successful stocks that may be attractive if the fundamental factors that fueled the performance remain.