Stock splits and stock dividends are often announced with great fanfare and strong press coverage. The accounting treatment of stock dividends and splits is slightly different, but for the investor stock dividends and stock splits are identical except in magnitude.

Stock dividends are distributions of additional shares of stock to shareholders instead of cash. For an investor holding 100 shares of stock, a 5% stock dividend would entitle the investor to another five shares of stock. When stock dividends are over 25%, they are typically called splits.

A positive stock split or dividend 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 per share and it declares a 3-for-2 stock split (a split ratio of 1.5), you will own a total of 150 shares at $60 per share after the split.

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 usually 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 that the board feels that performance is going to continue. Some companies have established stock dividends this year instead of cash dividends to preserve cash yet give investors a sense of reward.

This issue’s Stocks First Cut seeks out exchange-listed stocks that have undergone a positive stock split or stock dividend this year. The First Cut listing also includes: price performance over the last 13 and 52 weeks to judge short- and longer-term price strength; market capitalization 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 dividend, split or 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. ▪

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