Stock Splits and You

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.

Flip