The number of stocks priced at $100 or more is at a multi-decade high. Companies worried that sticker shock would keep small investors from buying used to split their shares in two or more to lower the price. But now splits are scarce, and a triple-digit stock has cachet.
“It shows investors have confidence in you,” says Jon Johnson, the editor of Stocksplits.net, an investing newsletter. “It’s another thing you can point to and say, ‘We’re doing fine in uncertain times.’ ”
Jeffrey Hirsch, the editor of the Stock Trader’s Almanac, calls it a new “badge of achievement.”
Among stocks in the Standard & Poor’s 500 index, 42 trade for $100 or more, according to Howard Silverblatt of S&P Dow Jones Indices, which manages the index. That is the highest in his records, which date back 36 years.
A surging stock market has helped lift the price of stocks, as has inflation. But experts suggest a bigger reason is that more companies are refusing to cut prices with splits. A two-for-one split, for instance, cuts a $100 share into two $50 shares.
Other features of the rise of triple-digit stocks:
• It reflects an investor retreat. Companies used to split shares because they worried small investors would get spooked by a $100 price tag, Silverblatt says.
But Main Street folks have been selling hundreds of billions of dollars’ worth of individual stocks from their brokerage accounts in the past 5½ years, according to the Federal Reserve. That has left much of the stock trading to professional investors and hedge funds and other institutions with plenty of money. So companies don’t feel pressure to split shares.
• Credit lower trading fees, too. Investors once bought and sold stock mostly in round lots of 100 to avoid paying higher broker commissions for odd lots. A high stock price made buying in blocks of 100 out of reach for some small investors.
In 1975, regulators banned fixed minimum charges for stock trading, forcing brokers to compete on commissions. Fees plummeted further with online trading in the 1990s.
• It’s no bull-market fluke. When the market was higher, at its October 2007 peak, $100-plus stocks numbered 33, fewer than today. In the dot-com boom in 1999, 27 breached the triple-digit mark.
• Don’t be fooled. A higher price might add prestige, but it says nothing about whether the stock is a good value. To figure that out, experts say, you need to look at how the price compares with its per-share earnings, among other measurements.
In the bull market of the 1990s, companies split stocks constantly to broaden their appeal. Dell and Microsoft split seven times each that decade. Cisco split eight times.
Since then, the number of splits has bounced around, but the trend has been down, and sharply. In 2000, there were 70 splits. In 2004, there were 38, a high for the past decade. In 2006, the last calendar year before the Great Recession, there were 32. The tally in 2012 is 10.
Splits have a bad reputation among some investors because they’re largely done for cosmetic reasons. After all, giving investors two new shares worth $50 each for an old one worth $100 does not make the new shares more valuable.
Or to put it another way, a pizza pie doesn’t taste any better if you cut it in more pieces.
In 1983, Warren Buffett blasted splits in an annual letter to Berkshire Hathaway shareholders. He said they suggest a company is focused more on the stock price than on value. He also thought they attracted more short-term investors – not a good thing, in his opinion. “A hyperactive market is the pickpocket of enterprise,” he wrote.
Berkshire created cheaper Class B shares in 1996 and split them 50-for-1 in 2010, to make it easier for owners of Burlington Northern Santa Fe, a railroad that Berkshire bought, to exchange their shares for Berkshire shares.
One possible casualty from the fall in splits is finance professors. They’ve written voluminous studies about them. There have been studies on the rise of splits, the fall of splits, why older firms tend to split less often than young ones, trading before splits, trading after splits and, most recently, why Vietnamese companies plagued by insider-trading are more likely to split.
The danger with the lack of splits is that investors will buy stocks because they think a higher price means it’s more valuable.
It’s “psychological,” says Joe Bell, senior analyst at Schaeffer’s Investment Research, about the appeal of triple-digit stocks. He adds, “It’s much ado about nothing.”
Among members of the S&P’s $100 Club, the highest price belongs to Google, at $682. Apple is in second place at $610. The rest come from a broad range of industries, from railroads (Union Pacific) to gambling (Wynn Resorts) to restaurants (Chipotle Mexican Grill) and oil (Chevron).
The biggest gainer among new members is Sherwin-Williams, the paint maker. Its stock has risen 69 percent since the start of 2012 on higher revenue and earnings. It closed Friday at $151.
For those coveting really high-priced stocks, the prize remains Class A shares of Berkshire Hathaway, which aren’t in the S&P 500 and have never split. They are worth $133,841 each.