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Companies, typically, go for stock splits to improve liquidity in their shares. It is also perceived that lowering of share prices by splits which do not affect the intrinsic value of the company attract more investors and improves chances of further appreciation.
“The idea is to increase the wealth of shareholders by making the stock affordable for new investors to enter and to ensure adequate liquidity for existing investors. We are seeing a lot of investor interest in such stocks,” said G Chokkalingam, founder of Equinomics Research & Advisory.
The bulk of companies going for stock splits are from the small-cap segment. A few big names in the list include Axis Bank, Havells India and J&K Bank. The benchmark Sensex has surged 25 per cent so far this year, while the small-cap and mid-cap indices are up 39 per cent and 49 per cent, respectively.
“Mid-caps and small-caps have a more retail flavour. So, it makes sense for them to go for stock splits, as higher prices might dissuade retail participants,” said Ravi Shenoy, assistant vice-president (midcap research) at Motilal Oswal Securities.
Market experts say an increase in stock split announcements is common during a bullish phase. As a stock split doesn’t change anything for the company from a fundamental perspective, experts caution investors from buying such shares merely due to this. They say investors should stay clear of companies which use stock splits only to stay afloat.
“Most companies announce stocks splits so that the market gives it recognition and the valuation increases. Of course, the official reason given for a stock split is to improve liquidity,” said Mehraboon Irani, head (private client group), Nirmal Bang.
Global trend
Apple Inc, the world’s largest market capitalisation company, had gone for a seven-for-one split in June. In other words, Apple shareholders holding one share got seven shares after the split. If not for the split, Apple shares would have traded above the $700 level (Rs 42,000), more than its entry-level iPhone and making it inaccessible to most investors.
US’ census data suggest the price of a single Berkshire Hathaway class-A share is four times the median annual income of an American household. Each of the company’s class-A shares is now worth $202,388, according to the closing price on Bloomberg for Wednesday. It crossed $200,000 for the first time last week. Warren Buffett, who runs the company and is considered the world’s foremost investor, has previously said that keeping shares at a high price keeps short-term speculators at bay and that the shares will better reflect the price of the intrinsic value of the underlying business.
The company does, however, have class-B shares, which were created in 1996 and then traded at one-thirtieth the value of the class-A shares. These shares were further split into 50 smaller pieces in 2010. However, these shares have very limited voting rights(1/10,000th that of class-A shares). The latest closing price was $134.91.
