Warren Buffett has never been afraid to go against the crowd. A drop in the number of companies splitting their stock to reduce their prices suggests bosses are coming around to his long-held view that splits are a meaningless gimmick. Technology and rule changes are helping ditch decades of corporate orthodoxy. Market psychology is being affected too: pricey shares are becoming positively prestigious.
Like changing a $20 for two $10 bills, simply dividing a company’s existing shares into smaller denominations does nothing to change its value. Buffett’s refusal to split Berkshire Hathaway’s A shares has pushed them to $760,000 apiece, although its B shares, issued in 1996 to make the company’s stock more accessible, are a more manageable $500.
Splits have been a popular practice, most notably in the US, in part because they tended to raise trading volumes and lower spreads. In the boardroom, splits have long been considered a signal of management confidence in a company’s prospects. Market studies have shown that, on average, dividing a stock produces an almost immediate pop of 3 per cent. Traders still hope to profit by identifying likely candidates.