Stock splits could be poised for a comeback.
Salesforce.com Inc. last night announced a four-for-one stock split, a move that will create more shares outstanding for the�Web-based business-software company, each at a lower price. The decision, which comes as the overall market continues to hover around record highs and companies are flush with cash, prompted at least one analyst to wonder whether Salesforce will kick off a fresh wave of stock splits for S&P 500 companies not seen since the 1990s.
“Companies are more comfortable with higher priced stocks then they historically were,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “If prices continue up (or at least hold their ground), I would expect an increase in splits as some boards continue to keep their stock in an investor friendly price range.”
Companies typically split their stock to make shares more affordable to smaller investors, among other reasons.�Considering�Salesforce shares closed at $172.73 yesterday prior to the announcement, the split could make the price look more appealing and increase the stock’s trading volume.
The decision comes as stock splits have largely been shunned by companies in recent years. As WSJ’s Matt Jarzemsky reported earlier this month, stock splits were a thing of the 1990s that have since gone the wayside of Starter jackets and Reebok Pump sneakers. Many more companies were splitting their stocks in the 1990s and early 2000s as opposed to the post-financial-crisis period over the past four years.
But now, major indexes at trading at record highs and stock prices getting more expensive by the day, creating an environment that could be ripe for stock splits to make a return.
There are currently 113 companies in the S&P 500 whose stock prices are at least $75, the highest amount since at least since 1980, according to Silverblatt. By comparison, only 12 S&P 500 companies have stock prices of $10 and under, the lowest amount since 2006.
Rumors circulated earlier this month that Apple Inc. was toying with splitting its stock, a move that could’ve potentially juiced what has been a fledgling stock price for the past six months. Apple didn’t split its stock and those rumors have since diminished.
Critics of stock splits say they do nothing to actually boost a company’s fundamentals. The impact on a company’s valuation is negligible and, some argue, they create superficial demand for shares that has a short shelf life.
In the 4-for-1 stock�split Salesforce announced, each shareholder by the April 3 close will receive three additional shares for every outstanding share held on the record date. These additional shares will be distributed on April 17, and trading will begin on a split-adjusted basis on April 18. The move will increase Salesforce’s shares outstanding to 1.6 billion, from 400 million.
Salesforce’s move drew praise from Jim Cramer, who called it a smart move. From Cramer:
I think Salesforce.com’s $170 stock is simply too treacherous to own, not because of how the company’s doing, which is fabulously, but because of how poorly the security trades. It is too thin and too unwieldy. Plus, it is endlessly footballed around by the hedge-fund community. Salesforce.com is a target — one that is so easily knocked down by shorts, so easily raided and so easily trashed that perhaps only a 4-for-1 may be able to stem the attacks. Put simply, I think they will go elsewhere for their prey if this stock no longer trades like at ten-pin in a Professional Bowlers Association tour. It will cease to be a frightening stock to own.
The question now is whether more companies will start following in Salesforce’s footsteps.
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