Isn’t a split a sign the company is a little shy on cash flow?>
RE: Isn’t a split a sign the company is a little shy on cash flow?
It’s really hard to tell the ultimate motive.
A stock split is simply when the company takes each slice of the pie and cuts them into even smaller pieces.
So for instance, where the pie may have previously had 10 million slices, now it has 20 million. The important thing is that THE PIE IS STILL THE SAME SIZE! It just has more pieces.
By the numbers, it has no effect on your economic stake in the company.
But there are other reasons why a split is beneficial.
1. It Expands the shareholder base. Many small or beginning investors start by investing in small amounts. If they have only $1,000 to invest, their entire investment would not even buy one share of Amazon before today.
So, by keeping share prices at reasonable levels, companies encourage investment by even the smallest market entrants.
2. It Makes portfolio management easier. It is a pretty common activity in portfolio management to rebalance positions or to sell a portion of one investment to fund a new one. High per-share prices make this more difficult, as you are dealing with larger chunks of your portfolio with each share.
3. They typically outperform the market over the next several years. In a study performed by David Ikenberry of Rice University, he found that stock splits substantially outperformed the market over both 1 and 3 year periods from the date of the split. What better beneficial reason could an investor want?