The Decline of Stock Splits

I’m happy that there are fewer stock splits than there used to be. Ideally, a company should split 2-for-1 or 3-for-1 once a decade or so. By the way, the worst abuser was JetBlu ($JBLU) who split 3-for-2 three times in three years despite not going anywhere. There’s been talk that Apple ($AAPL) may split soon so it can be added to the Dow.

There are lots of good factoids in this Bloomberg article:

Dow Reshuffle

Dow membership was last reshuffled in June 2009, when Cisco and Travelers Cos. replaced General Motors Corp., which filed for bankruptcy protection, and Citigroup Inc., the recipient of $45 billion in taxpayer aid.

Apple and Google Inc. have been passed over for inclusion because the shares would command the biggest weightings in the index, which ranks stocks by price. With both stocks trading above $600, they would have three times the influence of IBM, which has the largest weight in the index.

“Excluding IBM, tech’s weighting in the Dow is only 5.3 percent,” Sacconaghi said. Compared to the Standard & Poor’s 500 index, which is weighted by market value, technology stocks are underweight by 370 basis points in the Dow, he said. Apple has a 4.55 percent weighting in the S&P.

“This disparity between tech weighting in the Dow and S&P 500 leads us to believe Dow is likely to add more tech stocks, and that Apple would be a primary candidate if the company split its stock.”

Nine companies in the Standard & Poor’s 500 Index have announced stock splits this year and 16 did in 2011, according to S&P. That compares with an average of 35 from 2004 through 2007 and represents a fraction of the 102 in 1997, the data show. Splits are designed to attract investors by making stocks more affordable.

Historic Splits

While the bull market that began in March 2009 has pushed the benchmark gauge for U.S. equities within 10 percent of its record high this year, the lack of splits helped send the average price of shares in the S&P 500 to a record $58.52 apiece on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than when the index reached its all-time high of 1,565.15 in October 2007 and 31 percent above the index peak in 2000.

The Dow average was devised by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. Originally containing 12 stocks, it expanded to 20 companies in 1916 and to 30 in 1928. Members must have an “excellent” reputation, show sustained growth and “be of interest to a large number of investors,” according to the S&P Dow Jones Indices website.

Kraft Decision

The average’s new owners will face their first decision on how the 116-year-old gauge should be composed when Kraft Foods Inc. splits itself in two later this year. Kraft’s $70 billion market value is ranked 21th in the 30-stock gauge and will shrink with the spinoff of its of its U.S. grocery business.

Past spinoffs have led to deletions. Altria Group Inc. was dropped in February 2008, one month before the divestiture of its overseas tobacco unit and almost one year after its spinoff of Kraft. Westinghouse Electric Corp.’s split into separate manufacturing and media companies led to its removal in 1997.

The Dow, which began in 1896 with General Electric Co., American Tobacco and 10 other companies, was taken over in July by S&P Dow Jones Indices, a joint venture of McGraw-Hill Cos. and CME Group Inc. About $28 billion in products such as exchanged-traded funds are linked to the index, and changes prompt money managers to buy or sell stocks to match the adjustments.

Changes in the composition of the average “are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component’s core business,” according to the S&P Dow Jones Indices website. “When such an event necessitates that one component be replaced, the entire index is reviewed,” and “multiple component changes are often implemented simultaneously.”

Posted by on July 31st, 2012 at 1:20 pm

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