Stock splits partition the outstanding shares of a corporation into a larger number of shares. As the shares are split, the share price is proportionately decreased. Since the total value of all shares outstanding does not change, neither does shareholder’s equity nor each shareholder’s ownership interest. For example, a company declares a 2-for-1 stock split (a split ratio of 2.0) and you own 100 shares priced at $50 per share for a total value of $5,000. Once the split occurs, you will hold a total of 200 shares at $25 per share for the same total value of $5,000.

While stocks can see their share price rise after announcing a split, it’s important to realize that splits usually follow a period of strong price performance. Companies announcing splits seek to keep their stock price from getting too high. A stock split announcement represents a vote of confidence from the board of directors, acknowledging a company’s stock performance and signaling that the board feels performance is going to continue.

This issue’s First Cut Stocks seeks out exchange-listed stocks that have undergone a positive stock split (ratio greater than 1.25) over the trailing 12 months. The First Cut listing also shows 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. 

Keep in mind that a stock split 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 good. See the AAII How-To column in this issue on page 20 for more on stock splits.

Stock Splits Greater Than 1.25 During Trailing 12 Months
(From Most Recent to Oldest)

Related

AAII How-To

To Stock Split or Not to Stock Split

Dispatches

Economic and Market Conditions Influence Stock Splits

Feature

The Tax Consequences of Stock Splits, Mergers and Spin-Offs