More stock splits likely this year, experts say

Andrew Leckey

March 17, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Stock-split watchers, be on the alert. Experts predict that the number of stock splits in this year of economic recovery will exceed the 159 posted last year and could well beat the record 225 in 1983.

Already, firms like Wal-Mart Stores, Home Depot and International Game Technology have taken the plunge.

Technically, a stock split, in which an investor sees the number of his shares increase, is a non-event. The investor winds up owning more shares in the typical 2-for-1 or 3-for-2 split voted by a company's board. But the value of the holdings is the same as before that split. You simply own more shares of a stock that is priced lower.

Emotionally, however, there is a great deal to like about a split and the attention it grabs. The lower stock price makes the shares more attractive to a wider group of investors. A study by the New York Stock Exchange found that the average price after a stock split is $40 a share. Most investors prefer to buy a round lot of 100 shares; a lower price makes shares more affordable.

The stock price generally rises when a split is announced, falls just before the actual split and then starts rising shortly thereafter.

Proof that a split is considered positive is the fact that so many investors are dying to find out where the next split will occur.

Splits usually indicate that a company is doing well, its earnings are progressing and its stock has run up in price. An increase in the cash dividend frequently accompanies a split.

"While it's important to examine underlying fundamentals of a stock about to split rather than buying it solely on the split issue, the company is obviously making progress or it would not split," observed Joseph Tigue, managing editor of Standard & Poor's Outlook.

Among potential stock-splitting firms this year whose stocks are a fine investment, according to the Outlook, are American International Group, Synovus Financial, Dun & Bradstreet, Golden West Financial, Martin Marietta and Schering-Plough.

Some splits are fairly predictable.

"The price of Coca-Cola Co. will rarely get to $100 a share before a split is announced, because over the years that philosophy has virtually become company policy," said Mark Spellman, of C. J. Lawrence Inc. "Analysts in the business for a number of years pick up on company trends in stock splitting."

Some quality companies prefer the greater exclusivity of a higher stock price, as evidenced by the likes of Berkshire Hathaway, now about $12,000 a share, with no sign of a split in sight.

"Berkshire Hathaway, run by Warren Buffet, believes in long-term ownership of its stock, and that high stock price assures that it won't be traded as actively as lower-priced shares," said David Shulman of Salomon Brothers Inc.

Splits are loosely tied to the economy.

"Though the overall economy may be weak, certain industries and stocks will have done well," said John Markese, president of the

American Association of Individual Investors. "The fact that the stock market is volatile doesn't really have a lot of bearing on whether or not certain stocks will split."

These days, the price difference for buying odd lots of less than 100 shares has been reduced so that the dollar value of the transaction is what primarily dictates the brokerage costs, said Markese. But investors still prefer to buy stocks in the $30- to $50-a-share range.

"Research shows companies split their shares because they're trying to announce that times are going to be better," said Eugene Fama, professor of finance at the University of Chicago Graduate School of Business.

"However, more than half of the stock in a given company is now held by institutions such as mutual funds and pension plans which trade in really big lots, so the price of a share should be irrelevant."

Other firms that Outlook expects will split stock this year include Anheuser-Busch, Aon, CSX, King World Productions, Motorola, Promus and Safeco.

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