1. Google’s parent company, Alphabet, is going for a 20-to-1 stock split. Many investors are drawn to the event and even see it as a buying opportunity.
2. Before you get carried away, stock split is a cosmetic exercise and has no change to the company’s business fundamentals. Let me explain.
3. A stock split is aimed at reducing the stock price by increasing the number of shares. Stocks that have done well over the years would see the prices soar and to a point that it priced out more investors.
4. For example, Berkshire Hathaway A doesn’t do any stock split and it is trading at $473,000 per share. Hence, most companies pursue stock split to lower the stock prices.
5. How do they do it? By increasing the number of shares. In Alphabet’s case, the number of shares will increase by 20x and the share price will come down by 20x correspondingly – the current trading price of $2,865 will lower to $143.25.
6. If you have 100 shares pre-split, your position would be worth $286,500 (100 x $2,865). After the split, you will have 2,000 shares and your position would still be worth $285,000 (2,000 shares x $143.25).
7. Hence, a stock split does not increase your net worth. It just increases the number of shares (while reducing the share price).
8. Bonus issue on the other hand has some fundamental impact because retained earnings are shifted to paid up capital, and in turn reduces the ability to give dividends. Stock split is purely cosmetic without capitalisation of retained earnings.
9. Granted that Alphabet’s share price can still go up after the split but that is not because of the split. There are a myriad reasons why share price goes up – it could be growth better than expectation (fundamental reasons) or traders bid it up (sentiment reasons) or market buoyancy (macro reasons) etc.
10. Hence, look beyond the stock split if you want to buy Alphabet. The event itself is not the reason to buy the stock.
