Finance Chiefs Weigh Costs and Benefits of Stock Splits
Companies are analyzing the costs and benefits of splitting their shares, with several big businesses recently announcing plans to do so.
By splitting their stock, companies can make share purchases more affordable for employees and bolster their appeal to individual shareholders. As part of the decision, finance chiefs are tasked with considering the costs of a split, including marginally higher annual fees charged by stock exchanges for listing additional shares.
This year through June 27, four companies in the S&P 500—
com Inc., glucose-monitoring company
W.R. Berkley Corp.
—completed stock splits, according to
a data provider. Others, including Google parent
and electric car maker
have announced plans this year to split their shares. Last year, nine companies in the S&P 500 executed stock splits, up from eight a year earlier and five in 2019, FactSet said.
Share prices across industries have declined sharply in recent months as the Federal Reserve is tightening its monetary policy and concerns are growing about the economic outlook.
Stock splits reduce a company’s share price but don’t affect their underlying finances. For instance, companies that announce a 4-for-1 stock split divide their share price by four and provide investors with three additional shares for each share they own. Splits have come back in vogue in recent years after falling out of favor after the dot-com boom as companies have put a bigger focus on connecting with retail shareholders. Companies take on higher annual listing fees and administrative hurdles involved with shareholder notifications as part of the decision.
San Diego-based DexCom, which makes blood sugar-monitoring devices for people with diabetes, earlier this year decided to split its shares into four to make stock purchases more accessible to employees, Chief Financial Officer
said. All full-time U.S. employees can set aside money in their paychecks over a six-month period to buy the company’s shares at a discounted rate, but they can’t purchase fractional shares. DexCom had about 6,300 full-time employees as of Dec. 31, 71% of whom were based in the U.S.
DexCom previously noticed that it was issuing refunds to employees who at the end of the six-month period hadn’t set aside enough money to purchase a single share, Mr. Sylvain said. “We want to provide an opportunity for folks to have access,” he said, discussing the company’s motivation.
The company’s stock began trading on a split-adjusted basis on June 13. The company’s shares closed at $68.06 that day, down 7% from a day earlier amid a broader market selloff. The company’s shares closed at $75.45 Wednesday.
Intuitive Surgical Inc.,
which makes robotic surgical products, split its shares last year to make them affordable for employees,
the company’s finance chief, said. The company had just over 9,793 full-time employees as of Dec. 31. Its stock on Wednesday closed at $202.59, down 44% from the beginning of 2022.
The CFOs of DexCom and Intuitive Surgical acknowledged the recent selloff in stocks. DexCom said it doesn’t change how it views its decision to split its shares, but said it is too early to say whether the move has had an impact on the company’s employee stock program or if it attracted additional retail shareholders.
Tesla also cited its employee stock program as a reason behind its 3-for-1 stock split in its proxy statement this month. “We believe the stock split would help reset the market price of our common stock so that our employees will have more flexibility in managing their equity,” the company said in its filing.
Splitting the company’s shares will make them more accessible to retail shareholders, Tesla said in its filing. The auto maker’s shares on Wednesday closed at $685.47, down 43% from the beginning of the year.
Tesla didn’t immediately respond to a request for additional comment. Amazon pointed to an earlier statement, saying that the split gives employees more flexibility in how they manage their equity in the company and makes the stock more attractive to investors in general. Alphabet said the split will make shares more accessible to investors. Fortinet pointed to its proxy filing from last month, saying a split would make its shares more affordable, attract investors and increase liquidity in the trading of the company’s stock. W.R. Berkley didn’t immediately provide a comment.
Companies often have their own reasons for splitting shares that can be tricky for outside observers to identify, said
assistant professor of accounting at Michigan State University. By moving forward with a stock split, executives can signal confidence that strong prior earnings growth will continue, Mr. Kalay said. The decision might involve a company’s own preference for where it wants its shares to trade, he said.
Stock splits break up shares into smaller pieces—similar, for instance, to breaking a $50 bill into five $10s—without affecting a company’s underlying finances. Still, there are additional costs and logistical hurdles that companies consider.
Companies typically need to pay higher annual fees to the exchange that lists their shares. DexCom estimates it will pay an additional $30,000 in fees a year to Nasdaq as a result of its stock split, bringing its total annual fee to $167,000. The company during the first quarter generated a profit of $97.3 million, up 72% from a year earlier.
Annual fees paid to exchanges typically increase when companies register more shares, peaking at $167,000 a year for Nasdaq-listed companies that list more than 150 million shares. Fees on the New York Stock Exchange are capped at $500,000 a year.
For DexCom, an important cost involved with splitting the company’s shares involved notifying investors and preparing paperwork behind the scenes, Mr. Sylvain said. He declined to provide the total cost of splitting the company’s shares. “A motivated employee base is worth its weight in gold,” Mr. Sylvain said.
Meanwhile, some companies see limited upside from splitting their stock. Asked whether regional bank
PNC Financial Services Group Inc.
would consider a stock split, Chief Executive
in April said it would result in higher costs from listing and managing a larger number of shares. The company’s shares closed at $157.37 on Wednesday, down 24% since the beginning of the year.
“It doesn’t actually do anything for the performance of the company or change the economics of the company. So we’re not considering it,” Mr. Demchak said.
Write to Kristin Broughton at [email protected]
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