Stock Splits

By Brendan Nagle & Martin Dize

Market Report

The major stock averages closed higher Tuesday (April 15, 2014) in a session that experienced notable ups and downs. The Dow was alternately up about 100 points and then down 110, before regaining its equilibrium to push higher in late afternoon trading. There was speculation that this volatility was due to news reports of Russian troop movement in the Ukraine. However, by the end of Tuesday the Dow Jones Industrial Average rose 89 points, the NASDAQ moved up 11 points, and the S&P 500 was up about 12 points. Wednesday (April 16, 2014) benchmarks ended higher, primarily boosted by encouraging industrial production data and better than expected Chinese economic data. Yahoo’s higher revenues also contributed to the bullish mood. Fed Chairwoman Janet Yellen’s speech in New York was another positive factor that led to steady gains throughout the day.

Stock Splits

All publicly traded companies have a set number of shares that are outstanding on the stock market. A Stock Split is the decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2 for 1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2 for 1 split. After a split, the stock price will be reduced since the number of shares outstanding has increased

Companies will issue stock splits for a variety of reasons. The first reason is psychology. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more "attractive" level. The effect here is purely psychological. The actual value of the stock doesn't change one bit, but the lower stock price may affect the way the stock is perceived and therefore entice new investors. The split also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the price rises, they have more stock to trade. Other reasons for splitting a stock is to increase a stock's liquidity and aid in financial acquisitions.

Google and Under Armour Split

Recently two predominate companies announced they were going to split their shares, these companies were Google (Goog) and Under Armour (UA). Both of these companies are trailblazers in their respective areas and are growing at stable rates. However, the motivations for the stock splits of these two companies were wildly different.

Firstly Google announced that they were going split their stock for the first time, a 2:1 stock split, as of January 30 2014. This split was not what is termed a “traditional split” where a company simply doubles the existing amount of outstanding shares and halves the price of each share. Google’s board of directors announced, in what was termed a “founders move”, that they would be creating a new class of share when the split takes effect. Google before the split had two types of stock Class-A and Class-B.

Class-A shares were publically traded and came attached with the right to cast a single vote. Class-B, “founders shares”, were issued to the founders of Google and its initial investors when the company went public. Class-B shares hold value equal to that of Class-A shares. Class-B shares also have attached 10 votes per share. Google decided that in order to protect the future interest of the company and its founders that a new class of share should be created. Class-C shares were issued after the split on April 1 2014. Class-C shares hold no voting rights whatsoever. The creation of a new class of publically traded share required Google to create a new ticker. GOOGL in the new ticker and tracks the value of the Class-A shares. Class C shares are tracked under the historical ticker GOOG and to reflect the lack of voting rights GOOG is going to trade at a lower price than its counter part, though the stocks are likely to move in concert.

This move protects Google’s founders voting majority and allows the company to broker deal with the new Class-C stock. Prior to the split, when making transactions with other companies, Google had to either pay in cash or Class-A shares. Doing so could alter the board voting rights. The Class-C share can now be trading like cash without the risk of altering the voting power of the founders.

News of the split and creation of the Class-C shares was not received well by annalists. Annalist perceived the move to be a risk prevention maneuver by the company’s founders and not a more traditional reason for splitting.

Sportswear wunderkind Under Armour in contrast is splitting for the second time in as many years. Since UA’s last split in early 2013 Under Armour has grown 160%. The split of UA is a traditional 2:1 split where stockholders as of April 16 2014 are going to find that they have twice as many shares of UA stock at half the price. CEO and founder Kevin Plank announced the split as of March 17 2014, after which the share price of the stock hit an all time high of 128.80. UA split does not create a new class of shares, Plank and his brother hold nearly of the voting rights in the company. This split is about lowing the price of the stock in order to broaden the diversity of the companies share holders.