Stock Splits Rekindle a Polarizing Debate; eight of the 11 S&P 500 companies that have split their stock this year have since outperformed their peers, rekindling the debate about the value for shareholders

November 5, 2013, 12:27 AM ET

Stock Splits Rekindle a Polarizing Debate

MAXWELL MURPHY

Senior Editor

Stock splits have all but disappeared from the corporate playbook, but eight of the 11 S&P 500 companies that have split their stock this year have since outperformed their peers, rekindling the debate about the value for shareholders. Noble Energy Inc.NBL +1.25%, Flowserve Corp.FLS +1.16% and Gilead SciencesInc.GILD -2.30%, for example, all have at least doubled their number of shares outstanding this year, and had beaten the benchmark index by 20 to 63 percentage points as of the end of October.Companies use stock splits to lower their share price and make the stock more affordable for individual investors. Splits also can make the shares easier to trade and make employee stock grants more attractive, fans say.

“It’s a psychological thing,” says Robert Shearer, chief financial officer of VF Corp.VFC +1.45%, which makes North Face and Timberland apparel. Last month, VF said it would quadruple the number of its shares in December. That 4-for-1 split will cut the stock’s price and make it “a little bit more accessible to the retail side,” he said.

“There is some evidence that [companies who split their stocks] have outperformed” their peers later, Mr. Shearer said, but he acknowledged that it is hard to know whether the split helped or if those companies were “better-performing anyway.”

Stock splits have gone in and out of financial fashion over the past three decades, attracting fans and critics every time. Over time, institutional investors have come to dominate the ownership of most large companies, and they aren’t as affected by price psychology as individual shareholders, whose trades used to drive Wall Street.

In the 1970s, splits were in vogue with companies including Coca-Cola Co., Wal-Mart Stores Inc.WMT +0.34% and International Business Machines Corp.IBM +0.58%, according to FactSet. They were viewed as an almost universal indicator of corporate prosperity, signaling that a company’s stock had gotten too rich for mom-and-pop investors. The number of stock splits peaked in 1986, but the October 1987 stock-market crash slashed the number of splits by 75% the following year.

During the dot-com boom of the late 1990s, when day traders churned the market, the run-up in share prices of companies like Yahoo Inc.YHOO +0.03% drove the next wave of stocks splits. When the bubble burst in 2000, many stock prices fell to single digits and tech upstarts were delisted in droves from the Nasdaq Stock Market because, among other reasons, they didn’t meet the minimum price requirement.

A small flurry of stock splits by companies such as home builder Lennar Corp.LEN +0.43% and Bank of America Corp.BAC +0.14% coincided with the housing bubble, but the activity was nowhere near the frenzied levels of the past. “I do not see going back to the heydays of splits when splits stirred massive buying and we all received beeper alerts,” says Howard Silverblatt, senior index analyst for S&P Dow Jones Indices.

Home Depot Inc.’sHD +0.01% experience shows how the practice can go awry. The company splintered its stock 13 times between 1982 and the end of 1999, including three times in 1982 alone. That means investors would now own about 342 shares for every share owned in 1982.

But Home Depot reversed tack in 2002 and started buying back its stock in the open market to sop up some of the extra shares and return excess capital to investors. Since then, the home-improvement chain has spent at least $42 billion on buybacks. Its shares, currently trading near $77, hit their highest level ever above $81.50 earlier this year.

“Obviously, mathematically no value is added” in a split, Chief Executive Frank Blake, who took over in 2007, told shareholders at Home Depot’s annual meeting in May.

Many companies appear to agree. The average stock price in the S&P 500 is currently above $74 a share, by far the highest since at least 1980, according to Strategas Research Partners. Since September, shares of Priceline.com Inc.PCLN +1.72% andGoogle Inc.GOOG -0.09% both have topped $1,000 apiece.

Such prices don’t scare off institutional investors, who own 70% or more of the shares in 20 of the 25 highest-priced stocks in the S&P 500, according to Strategas. Retail investors, who ran for cover after the Internet bubble, hold little sway at those companies.

“We have no viable need to attract penny stockholders,” said Jan Siegmund, CFO ofAutomatic Data Processing Inc.ADP +0.27%, a big payroll processor based in Roseland, N.J. “I am also personally of the opinion that it is creating no value.”

Moreover, splits aren’t free. They increase administrative costs and market listing fees.

Nonetheless, at least four of the companies that split this year said they were doing it to increase value for stockholders.

Colgate-Palmolive Co.’sCL +0.52% CEO Ian Cook said its 2-for-1 split in May demonstrated, “our confidence in the continued strong and profitable growth of Colgate’s global business.”

Kenneth Fisher, Noble Energy’s CFO, says the company’s research indicates companies that split outperform their peers by 2% to 3% in the near term. Noble Energy shares have risen about 29% since its split in late May, compared with a gain of just over 6% for the S&P 500.

The majority of Noble’s shares are owned by mutual funds, and Mr. Fisher says large investors may view splits as “indicative of a faster growth outlook.”

W.W. Grainger Inc.GWW +0.67%, a Chicago-based supplier of industrial gear, is one of about 75 companies in the S&P 500 with a stock price above $100. “Splitting our stock is currently not a consideration, but we watch this regularly,” says CFO Ronald Jadin.