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
|On the Offering||100||16.50|
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.
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