An Old Way to Make New Friends

ONE of the most remarkable phenomena of the bull market has been the rash of stock splits, and the way they have sent stocks scooting up. Staid old American Telephone & Telegraph, for 73 years a holdout against splitting, soared 65 points from 202 within a few weeks after its 3-for-1 split announcement. So popular has splitting become that 80 major companies have registered or announced splits this year, and Wall Streeters feel sure that the old record of 181 splits (in 1955) will be topped before the year is out. While stock splits have gladdened many a stockholder, they have produced a good deal of misunderstanding and confusion among others. They have also stirred opposition from some financial experts.

Many stockholders are baffled by splits; they think that a 2-for-1 split doubles their money. Actually a stock split does not of itself increase the stockholders' equity at all. The new shares are based on the same corporate net worth, thus are technically worth precisely half the old. Sewell Avery, former board chairman of Montgomery Ward, long opposed splits, sneered at them as "two hat checks for one."

The most fervent opponents of splits are old-line managements who feel that the high price of a stock is synonymous with quality. Splitting a blue chip selling at $100 so that it sells at $20 would wash out its blueness. Superior Oil of California takes a defiant pride in the fact that its stock sells at $1,850 a share.

But most Wall Streeters and nearly all stockholders like splits. A split produces an optimistic psychology among investors; it seems to promise that things are going well with the company, especially when the split is accompanied by a hike in the dividend. Corporations like splits because they keep the price low, broaden the market for their securities. Many an investor would rather buy 100 shares at $15 a share than ten shares at $150. Atlantic Refining was selling at $86 and losing stockholders when it split its stock in 1952. In the following few months its list of stockholders increased by 34%, the next year by another 19%. Other companies, such as General Motors (which has had two splits since 1946), feel that every stockholder is a potential customer or an unpaid salesman and publicity man; therefore the price of the stock should be kept low enough to lure buyers.

When a privately held company with only a small issue of stocks offers its shares to the public for the first time, it usually has to split to sell in a popular price range. The stock of Upjohn Co., valued at $1,125 a share, was split 25 for i before public sale so that the price to the public was $45 a share. Similarly, when the Great Atlantic & Pacific Tea Co. wanted to sell a large block this spring, it first split the old shares, selling at around $500, so that the price to the public was $44.50 a share. Even conservative underwriters think there is a time for companies to split. Says Sumner Emerson, partner of Morgan Stanley & Co.: "A company that is going ahead fast and thinks it is going to have to sell more stock to finance its growth should probably split when its shares go to a high price."

More extreme advocates of splitting say that all U.S. corporations should split their stock so that it sells at $10 to $15, where it can compete with mutual funds. Many funds price their shares in this range (e.g., Lazard Fund, One William Street), keep splitting so that prices remain low. Says Harold Clayton of Hemphill, Noyes & Co.: "A. T. & T., at 20 or 10 or 5, is a blue chip regardless of its selling price."

Many investors believe that splits bring higher prices, but this is not necessarily so. To push up the price the company must also raise the dividend. After a two-year study, C. Austin Barker reported in the Harvard Business Review that 75 companies that split their stock and raised the dividend quickly gained 18% in price over and above the rise in the market, held the gain six months later. But a group of 13 companies that split their stock without raising dividends temporarily gained only 5% in price, dropped back 8% below the market level by the end of six months. Nevertheless, in a rising market lower-priced, split stocks tend to move faster than the old shares, as long as the company's outlook is improving.

On the whole, stock splits serve a good purpose by bringing the price of blue chips down to what the public likes to pay. They also enlarge the supply of stock to keep up with corporate growth. Otherwise, as institutions have stepped up their buying of blue chips, the supply of stocks would have become so short that the price would have climbed far above the level that the public could afford. IBM would scarcely be widely held if it had not had many splits; one share today would cost more than $17,000. Thus, by seeking out new stockholders by splits, U.S. industry is making people's capitalism one of the major sources of strength in the U.S. economy.

This file is automatically generated by a robot program, so reader's discretion is required.