Sunday, November 14, 2010

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 SplitsSharesCost per ShareMarket Price
On Split Date
Record DateDistributed
On the Offering10016.50     
May 19712008.25$47.0005/19/7106/11/71
March 19724004.125$47.5003/22/7204/05/72
August 19758002.0625$23.0008/19/7508/22/75
November 198016001.03125$50.0011/25/8012/16/80
June 198232000.515625$49.87506/21/8207/09/82
June 198364000.257813$81.62506/20/8307/08/83
September 198512,8000.128906$49.7509/03/8510/04/85
June 198725,6000.064453$66.62506/19/8707/10/87
June 199051,2000.032227$62.5006/15/9007/06/90
February 1993102,4000.016113$63.62502/02/9302/25/93
March 1999204,8000.008057$89.7503/19/9904/19/99

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.

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