INVESTING | Splitting Stocks
Alibaba (BABA) recently announced it is considering an eight-for-one stock split. Previously stock splits were relatively common, but recently they have been out of vogue.
Companies primarily split their stock to bring the stock price to a lower range making it more affordable for retail investors. Other than the emotional impact of a lower share price, a stock split does not have any impact to investors. In the most common, and easy to understand, two-for-one stock split, the company doubles both the total shares outstanding and the number of shares held by each investor. An investor who holds 100 shares of a company with 1,000 outstanding shares will then own 200 shares of a company with 2,000 outstanding shares. In both cases the investor owns 10% of the company.
Many companies utilize stock splits to manage share price. Case in point, Coca Cola (KO) has split its stock 11 times over the past 100 years; Apple (AAPL) has split its stock four times; Amazon (AMZN) split its stock once in 1998 and twice in 1999. Other companies do not split their stock price; the most notable is Berkshire Hathaway (BRK), which is currently trading at $305,480.
In the case of Alibaba’s current share price and eight-for-one stock split would drop the trading price to about $20. The lower share price would make the stock more attractive to retail investors who might otherwise be put off by a $160 share price. Alibaba is evaluating this stock split to coincide with their potential initial public market in Hong Kong. The lower stock price would increase the number of potential Chinese investors who could participate in the offering. Alibaba’s statement explained “The Board of Directors is proposing the Share Subdivision to increase the flexibility for the Company in future capital market activities,”.
Alibaba’s shareholders vote on the stock split at the annual general meeting on July 15th in Hong Kong. If passed, current investors will receive one share for every eight shares they currently own and a check for the fair market value of the difference for any shares below eight full shares.