Investing Commentary

Stock Splits and You

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Companies often initiate a stock split when the stock price has had a significant run-up.  By splitting the stock, a company can increase liquidity, while not altering their market cap or diluting it’s shares. The object is usually to make the stock more affordable to small-time investors and encourage trading.

In this post we’ll see how over time stock splits can substantially increase your wealth.

A stock can be split in any number of ways, but the most common stock splits are 2-for-1, 3-for-1, and 3-for-2.

The reverse can also happen, where a company condenses their shares in order to increase their price.  They may do this to gain respectability, make their shares more attractive, or prevent being de-listed from an exchange.

Over time, splits can create substantial wealth.  Take for example this chart, which I copied right from the Walmart Investor Relations site. It shows the effect stock splits have had on a basket of 100 shares bought in 1970.

2:1 Stock Splits Shares Cost per Share Market Price
On Split Date
Record Date Distributed
On the Offering 100 16.50
May 1971 200 8.25 $47.00 05/19/71 06/11/71
March 1972 400 4.125 $47.50 03/22/72 04/05/72
August 1975 800 2.0625 $23.00 08/19/75 08/22/75
November 1980 1600 1.03125 $50.00 11/25/80 12/16/80
June 1982 3200 0.515625 $49.875 06/21/82 07/09/82
June 1983 6400 0.257813 $81.625 06/20/83 07/08/83
September 1985 12,800 0.128906 $49.75 09/03/85 10/04/85
June 1987 25,600 0.064453 $66.625 06/19/87 07/10/87
June 1990 51,200 0.032227 $62.50 06/15/90 07/06/90
February 1993 102,400 0.016113 $63.625 02/02/93 02/25/93
March 1999 204,800 0.008057 $89.75 03/19/99 04/19/99

As you can see, if you had held those 100 shares, you would now be sitting on roughly 204,800 shares of Walmart.  At the current price of 54.13, that has a value of 11,085,824 and a dividend income of 247,808 a year.  Not bad.

This chart does not take into account the reinvestment of dividends, which would have supercharged these returns.  That’s the power of holding a strong, growing, cash producing company.

2 Comments

  1. I just found this website. I love this site… Thanks Dividendpig.com

    I will look at this site weekly… Thanks.. Brent

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