Three digit stock prices have become a status symbol in corporate boardrooms
We have never thought that stock splits made much difference, but it is interesting to watch corporate treasurers reach the same conclusion. Stock splits seem to be going out of fashion.
Since the mid 2000s, three and even four digit stock prices have become common-place and many of the most important companies are comfortable letting their prices rise without the traditional adjustment near the $100 mark.
In the Dock Street Model Portfolio, there are 12 stocks trading above $100 per share. Even two are above $1,000. Throw in a few Exchange Traded Funds and nearly half of our portfolio trades are at these lofting levels. (We’ll get into why this happened below)
Although Warren Buffett was the first to adopt the no split policy at Berkshire Hathaway, it is the founders of Google who probably deserve credit for the new fashion of high priced stocks. Instead of going public near the traditional $20 level, Google debuted at $85 per share and in the offering documents, Larry and Sergey announced their intention of not splitting the stock. At the current price of $1,063, they show no signs of budging from that plan.
So would Google, or Apple, or Precision Castparts be trading at a higher values if the price was lower due to stock splits? Maybe. We know investors who think these stocks are “expensive” just based on the price. So perhaps some of that bunch would buy Apple, following a 10 for 1 split, if the stock were trading at $54 dollars with $4.50 of earnings instead of $540 with $45 of earnings. Who knows?
But those slightly lower valuations might be one reason we’ve ended up with so many high priced stocks in our portfolios. The mistaken impression that these stocks are “expensive” may be why we find them such compelling values. We know they are not expensive when compared to their earning power—they just look that way.
For those still unconvinced that stock splits matter, we take you back to a Berkshire Hathaway meeting in the early 1990s with the A shares trading at $13,000—somewhat lower that the current price of $174,696. When asked if there were plans to split the stock, Charlie Munger said he liked the price because “it kept the riff raff out.”
Buffett went into more detail.
He said stock splits reminded him of the guy who ordered a pizza and when asked if he’d like it sliced into four pieces or eight, he replied, “Better make it four, I don’t think I can eat eight.”
Hope you all enjoy the Thanksgiving Holiday.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.