Why do stock splits happen and how do they affect me as a shareholder?

Factual Questions
1

The grocery store chain I work for is employee-owned. What this means in practice is that the stock is not publicly traded and 90% of the stock is owned by employees or by the employee CBA (the remaining 10% is held by the family of the late founder). For each year an employee works for the company, they’re awarded an amount of stock equal to 20% of their total wages for the year, and when they retire or otherwise leave the company their shares are automatically sold back to the CBA at a share price which is set every year in the spring by an outside auditor. I’ve been working for the company for just shy of 12 years and I currently hold about $150k in company stock, which has considerably outperformed my 401k over the time I’ve worked there.

Today I got an email from the company announcing a 4-for-1 stock split. They describe this as being a good thing that they’re able to do because the stock has increased in value by an average of 11% per year since the last stock split, which happened several years before I joined the company. It has been a pretty good decade for the company - we’ve doubled our number of stores since I was hired and expanded into several new states, and we did record-breaking sales during the panic-shopping of the early pandemic and over this past holiday season.

What I don’t understand is why this is a good thing. Does the company benefit in some way from splitting the stock? Do I benefit in some way? What motivates a company to split its stock? It’s not as if I can do much about it, since I don’t have the ability to sell stock or to buy any more, but I’m wondering what it means for the company and the value of its stock going forward, since that’s the largest part of what will hopefully enable me to retire in 20 or so years instead of having to work into my old age until my body falls apart.

2

It is usually done when a company’s stock is significantly higher than stocks from similar companies. This gives the often false impression that the company’s stock is overvalued, which makes investors reluctant to buy it. Splitting the stock puts its value back in line with other similar stocks, which makes it more appealing to investors.

3

True, but it’s not a publicly owned stock, so who cares?

4

For an ordinary publicly traded company, a stock split essentially is a way to double the number of shares, and simultaneously halve their price. From the POV of an individual shareholder it makes no difference: you had, e.g. $150K of shares before, and you have $150K of shares afterwards.

Historically there was great benefit to keeping stock prices within a “reasonable” trading range of, WAG $10 to $100. Shares selling for less than $10 signalled a weak or dying company whether or not that was true. While shares over $100 were unaffordable back in the days of high commissions on anything less than a round lot of 100 shares = $10K. This was back when $10K bought a decent suburban house or a bit later a decent midrange new American-made sedan.

So if the company boomed and the price got up to e.g. $150, it was beneficial to split 2:1 and reduce the share price back to $75. This facilitated trading in the stock.

This issue is not as practically large as it was 30 years ago, but some aspects of financial “style” are surprisingly conservative.

From the shareholder’s POV the moment before and after the split they’ve got the same total value. So it ought to be a non-event, except for what it signals about management’s opinion of the future price trajectory. Which was evidently positive. Management thinks as high as the price is, it’s only going higher. SO they split to re-baseline the price at a more tradeable range, which ought, in theory, to increase interest in the shares as @Machine_Elf says. Which increased interest puts further upward pressure on the price.

You didn’t ask, but a reverse split is the same thing in the opposite direction. Which usually happens when a company really is on hard times and is trying to put a misleadingly brave face on things. From the shareholder’s POV the moment before and after the reverse split they’ve got the same total value. So it ought to be a non-event, except for what it signals about management’s opinion of the future price trajectory. Which was evidently negative.


As @dolphinboy rightly says, all the above is more or less pointless for a closely held company such as your employer. The share “price” is artificial, as is the number of shares.

But they still have some interest in manipulating the share price via spilts. If the share price gets too high, it’s like playing poker with only very large chips. Issuing high-priced shares to low-wage employees means either they need to deal with fractional shares, or they end up with big injustices when one employee gets 5 expensive shares for the year and another gets 6 expensive shares due to rounding while their actual wages differed by just a smidgen. A 4:1 split means they can “make change” more easily with the smaller denomination.

Another possibility is they’re thinking about going public. Maybe not this year, but in a few years. And they want to position the shares at the “right” price to attact public interest.

5

Perhaps for similar psychological reasons. Getting 1,000 shares sounds so much more exciting than getting a measly 250 shares?

6

@ engineer_comp_geek has it right.

How this helps you and the company is liquidity

You are an employee and you hold stock to the value of $150k. You have a single share.
As a measure of value, this is identical to holding 150 shares @ 1k or 150k shares @ $1.
But for a new employee wanting to buy stock the unit price is prohibitive. Similarly for an existing stockholder to increase their stake. Reduced demand puts downward pressure on the price. Or when you need to sell your stock. You need to find one person to fork out the $150k. If nobody has the dosh to buy your $150k share, then it’s not worth $150k.

If the stock was split 1000:1 making the unit price $150, then buying in or selling out or simply trading is much more viable.

7

Sometimes, it’s used to increase the share price. Recently GE, whose stock took a hit over the years (when I got it, it was around $25; it traded around $10 before the split). In their case, it was a reverse split: you got one share for every eight you owned. Stock price went up.

Note that a split in either direction has minimal effect on the value of the stock. You also get a check to cover rounding issues.

8

I think you meant @engineer_comp_geek, not me.

9

Stock splits are the refutation of the notion that the market is always rational.

Rational investors would not care whether they owned 100 shares at $25 or 25 shares at $100 if that was the same percentage of the total. The distinction only works if the market participants use emotional reasoning on whether to buy or sell.

Obviously, people do view the market through other than strictly rational lenses, so in some cases and at some times it may be in the company’s interest to do a split or reverse split. I have no idea whether the OP’s company is right to do a split, and I suspect that a good economist would find that the management doesn’t have a rationally defensible case. But I can’t prove that. All stock prices are essentially bets on the future, and the future can endlessly surprise.

10

Back in the dot com boom and irrational exuberance hype, a stock split would see the shares jump the next trading day by 10-20%. It was simply a trading expectation that shareholders (aka dumbasses aka rubes aka marks) would think that a $50 dollar stock was cheap versus a $100 stock regardless of any metric of underlying value. They would only look at the face value or perhaps the “affordability” value. Small penny ante “investors” could buy a one lot of a $10 stock, but not afford the one lot of a $100 stock, so they played in the ~$10 share price universe, and the right stock split would take a $1000 stock and let the small folks buy in.

So, ya, in this case of a private company. The answer is likely
a) give employees “more” stock on paper (Hey Jane, you got a thousand shares this year, way to perform and get rewarded)
b) maybe tie into perception of “value” if there is an intent to go public
c) founding family don’t understand finance?

11

Quite right. D’oh on me.

12

I certainly hope there’s no intent of going public. As it is, we get all the benefits of being union employees without having to pay UFCW dues and our healthcare is dirt cheap because it’s heavily subsidized out of corporate profits, which would probably change if we weren’t employee-owned anymore.

The employee ownership is a big part of the corporate culture, though - the CEO and most of the C-suite and VPs were store managers back when the founder died, and they threatened to resign en masse if the family sold the company to anyone other than the employees. Employee ownership is a big part of our internal and external marketing, so hopefully that won’t change any time soon.

13

You wouldn’t work for WINCO would you?

14

Indeed I do.

15

<< removed by poster >>

16

Rational investors do, however, care about whether they can afford the stock. Somebody who is just starting out very well may not have the money to afford even a single share of stock that costs $300, but can afford 2 or 3 shares at $50.

17

And yet there are shares of Berkshire Hathaway (think Warren Buffet) that are $438,000/share.

Granted that is an outlier but goes to show how much these things can vary. There are also penny stocks (less than $5/share).

18

The Australian share market has traditionally expected listed companies to have moderate unit share prices but with large issue books. Few Australian stocks have a price of over AUD 100 .
CSL (pharmaceuticals) CSL AUD 301.52
Cochlear (medical equiment) COH 212.50
Macquarie Group (finance) MQG AUD 187.00

Market leader BHP AUD 49.55 has split 8 times since 1984. (Apple has split 5 times)
One BDP share in 1984 would now be 4.5 shares because they have done some quite small splits eg in Jun-22 1121:1000 and there was a 1:2 consolidation in May-87

The other end of the spectrum most of the speculative mining stocks trade well below AUD1.00 . Tali Digital Ltd (TD1) last traded at AUD 0.003, however there are 2.7billion shares on issue.

19

My various mutual fund accounts all show a non-integer number of shares owned. Is it not possible to own a fractional share of a stock?

20

Might depend on jurisdiction, but I don’t think you can sell a fraction of a share.