Why do you think there are so few stock splits these days? In Canada, many companies are trading at triple- or quadruple-digit stock prices and yet I see no indication of pending splits. Some of the Canadian banks come to mind. Any thoughts?
Stock splits might not be as common as they once were, but they haven’t disappeared altogether. In the past few years, there’s actually been something of a resurgence, especially among U.S. tech companies whose shares have soared in price.
Last year alone, several high-profile companies split their shares, including Nvidia Corp. (10-for-one split), Walmart Inc. (three-for-one), Chipotle Mexican Grill Inc. (50-for-one) and Canadian Natural Resources Ltd. (two-for-one). They joined Amazon.com Inc., Shopify Inc., Apple Inc., Alphabet Inc. and others that had split their shares in the preceding few years.
That said, you are correct that many companies that might have been expected to split their shares by now are instead letting their stock prices run.
There are a few possible explanations for this. Historically, companies would announce a stock split to increase liquidity and lower the price of their shares, making them more affordable for retail investors.
This likely goes back to the days when investors usually had to buy shares in multiples of 100, called board lots. If the shares got too expensive, some investors might not have been able to afford them. A stock split was a quick and easy fix.
But the industry has evolved. Thanks to modern trading systems, it’s now easy for investors to purchase shares in any quantity they desire, reducing the motivation for companies to split.
What’s more, a growing number of brokers – including Wealthsimple Trade, Interactive Brokers Canada, Questrade and TD Direct Investing – let clients buy fractions of shares. Can’t afford a single share of Constellation Software Inc. at nearly $5,000 a pop? No problem. You can buy one-10th of a share for about $500, or one one-hundredth of a share for about $50.
Bank stocks haven’t gotten to such extremes – yet. But they’re trading well above the dollar levels that, in the past, preceded splits. Yet, most banks appear to be in no hurry to split their shares.
Royal Bank of Canada, for instance, last effected a split in 2006 when the price was about $97. Today, Royal Bank’s shares trade for about $180. Bank of Montreal’s last split was more than a quarter-century ago, in 2001, when the stock price was about $76. The shares now trade for about $155. Even after adjusting for inflation, both stocks are well above levels prior to their most recent splits.
The only major Canadian bank to have split its shares in the past 10 years was Canadian Imperial Bank of Commerce, which announced a two-for-one split in 2022.
If you’re expecting other banks to follow CIBC’s lead, you probably shouldn’t hold your breath.
“We are not considering a stock split at this time. Our share price reflects the strong performance of our business and the confidence in our continued growth trajectory,” Bank of Montreal said in an e-mailed statement.
“The market has evolved, and we don’t consider a higher share price as a disadvantage to our shareholders.”
Royal Bank declined to comment on stock splits specifically but provided the following statement: “RBC is committed to delivering long-term value for our shareholders and takes into account the interests of investors of all sizes.”
It’s important for investors to understand that stock splits, in and of themselves, don’t add any economic value. Yes, it’s nice to see extra shares land in your account. However, after a two-for-one split, you’ll own twice as many shares, but each share will be worth half of what it was before (all else being equal). The total value of your investment won’t change.
So, it’s not like you’re missing out on anything if a company you own doesn’t split its stock – except for the warm and fuzzy feeling some investors get from a split.
Can you indicate the yield of your model dividend portfolio?
Sure. As of July 11, the portfolio was generating about $8,160 of cash annually, based on current dividend rates. That’s nearly double the $4,094 of cash the portfolio was throwing off at inception on Oct. 1, 2017.
Dividing $8,160 by the portfolio’s July 11 value of $190,956 gives us a yield of about 4.3 per cent. In the future, I’ll include the yield with the monthly portfolio update, which you can find at tgam.ca/dividend-portfolio.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.