Understanding Stock Splits: Insights and Real-Life Examples from an Investor’s Perspective

Can a public company split its stock as many times as it would like? The answer may surprise you, but it comes with several considerations and real-life examples that help paint a clearer picture.

The Liberty to Split a Company’s Stock

On paper, a company may indeed choose to split its stock as many times as it desires. For example, tech giants like Apple (AAPL) have undergone multiple splits over the years: a 7-for-1 split in 2014, a 2-for-1 split in 2005, another 2-for-1 split in 2000, and yet another in 1987. To convert a quantity of pre-split shares to post-split shares across multiple splits, simply multiply the ratio value of each split together.

Reasons Behind Stock Splits

Companies often choose to split their stock to increase its liquidity, making it more appealing to retail investors. However, not all companies opt for this strategy. For instance, Berkshire Hathaway Class A (BRK.A) stock has never been split, as Warren Buffett prefers only long-term investors to hold it. This explains why Class A stock is valued at over $300,000 per share. Such a strategy ensures that the company’s stock remains less volatile and attractive to dedicated, long-term investors.

The Case Against Frequent Stock Splits

Not all companies can or should split their stock as frequently as they desire. For example, Nike (NKE) stock experienced significant growth in the last decade, prompting two recent forward stock splits: one in 2015 and another in 2012. Each split occurred when the stock price had reached or surpassed a certain level, indicating a successful run-up.

Real-Life Examples and Insights

Let’s consider the stock split pattern of Nike (NKE). The company’s stock experienced a notable price increase, rising from around $40 to $90 or $100, before undergoing a split that brought it back down to about $50 per share. The stock then climbed back up to approximately $100, and another split followed. This cycle has repeated several times with NKE, doubling the value of investments for each 2-for-1 split.

Investors who participate in these splits can significantly benefit from the price increases both before and after the split. This is a remarkable and personally experienced phenomenon that goes beyond textbook knowledge. It’s a real-life example of how stock splits work in practice and how they can lead to substantial gains for investors.

Some argue that stock splits are just an accounting trick that adds no real value to investors. However, my experience and that of other investors validate the notion that stock splits are tied to price appreciation, not just splitting the stock for the sake of it.

Conclusion

In summary, while a public company has the liberty to split its stock as many times as it desires, the decision often hinges on factors like the stock’s price performance. Real-life examples, such as Nike, demonstrate that stock splits are not arbitrary but linked to meaningful price increases. For investors, participating in these splits can be a rewarding strategy, as long-term success often follows price growth.