Why do a 5:4 stock split on a $31 stock?

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Why do a 5:4 stock split on a $31 stock?

Postby DonDraper » Thu May 09, 2013 8:56 pm

I own shares in Aqua America (WTR). Today they announced a 5:4 stock split. The stock is only trading at $31 prior to the split.

What would be the motivation behind this stock split?
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Re: Why do a 5:4 stock split on a $31 stock?

Postby nirvines88 » Thu May 09, 2013 9:13 pm

Didn't know about this, interesting. This is one of the 4-5 individual stocks I have remaining that I haven't sold. Will be interested to see how I input this into my portfolio manager!
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Re: Why do a 5:4 stock split on a $31 stock?

Postby LadyGeek » Thu May 09, 2013 9:15 pm

Here's the press release: Aqua Announces 9 Percent Cash Dividend Increase and Stock Split

The 5:4 split represents a 25% increase in stock distributions (more stock on the market). I don't know the motivation behind this specific move, but Investopedia has a good tutorial on the general idea: Understanding Stock Splits
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Karamatsu » Thu May 09, 2013 9:18 pm

All I can think is that they're trying to keep the dividend payout per share within some narrow range, which would explain the timing of a split and the same time as a dividend increase. Maybe they think that, by keeping the dividend-per-share figure in a tight range they reduce volatility and therefore make the shares look more bond-like (since volatility = risk in some circles)? But it seems like an awful lot of work to go through. Cynical me, I'd also look to see if there's some way for insiders to benefit disproportionately from the split, but unless there's some unusual stuff in the executive compensation rules I'm not sure what it would be. You could write to the IR people and ask them. Of course, you'd only get the lawyer-approved answer, but it still might tell you something.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Grt2bOutdoors » Thu May 09, 2013 9:28 pm

I actually own this from the days it was known as Philadelphia Suburban. Now, if my recollection is correct - the stock historically traded in the $17-$25 range for a good period of time, and with that 5% discount assuming you Drip'd the dividends, that was an average price of low 20's. So, it makes perfect sense to keep the stock price in that range by splitting the stock and encouraging the little guy, including many of their water utility customers to be direct owners of it. N.D. has done a pretty good job there over the years, don't you think? BTW, many of the splits have been 4 for 3 and 5 for 4 - so it's inline with the current proposal to split it.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby danwhite77 » Thu May 09, 2013 9:31 pm

Probably because some investment bankers (who sold the idea to the company) will get paid lots of money to do so.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Epsilon Delta » Thu May 09, 2013 9:39 pm

Or some bizarre clause in somebody's stock options.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Grt2bOutdoors » Thu May 09, 2013 9:47 pm

Epsilon Delta wrote:Or some bizarre clause in somebody's stock options.


Stock options strike prices are adjusted by the stock split as are the number of options granted. In other words if the call price of the slice is $8 and due to the split it is now $6.40 but the number of options has increased to 1.25 shares - the call value is still $8. What have they gained? Nothing - the pie size remains the same.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Grt2bOutdoors » Thu May 09, 2013 9:50 pm

danwhite77 wrote:Probably because some investment bankers (who sold the idea to the company) will get paid lots of money to do so.


Do you know anything at all about the company? Have you read the financial statements? It's annual report is one of the cleanest and thinnest reports out there - it's a water utility and growing very nicely I might add. Who knew, a boring water utility actually makes money because heck, where else are you going to go? It's the ultimate "captive" customer base out there.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Busting Myths » Thu May 09, 2013 11:45 pm

Grt2bOutdoors wrote:
danwhite77 wrote:Probably because some investment bankers (who sold the idea to the company) will get paid lots of money to do so.


Do you know anything at all about the company? Have you read the financial statements? It's annual report is one of the cleanest and thinnest reports out there - it's a water utility and growing very nicely I might add. Who knew, a boring water utility actually makes money because heck, where else are you going to go? It's the ultimate "captive" customer base out there.


Danwhite is right. Stock splits do not result in a change in value of your holding so why go through the process if it does not add value to the company?
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Re: Why do a 5:4 stock split on a $31 stock?

Postby bertilak » Fri May 10, 2013 8:37 am

Grt2bOutdoors wrote:I actually own this from the days it was known as Philadelphia Suburban. Now, if my recollection is correct - the stock historically traded in the $17-$25 range for a good period of time, and with that 5% discount assuming you Drip'd the dividends, that was an average price of low 20's. So, it makes perfect sense to keep the stock price in that range by splitting the stock and encouraging the little guy, including many of their water utility customers to be direct owners of it. N.D. has done a pretty good job there over the years, don't you think? BTW, many of the splits have been 4 for 3 and 5 for 4 - so it's inline with the current proposal to split it.

I think that is the reason.

Stock splits are, as far as I know, simply to keep the price within an affordable range. The company I worked for had an employee stock purchase plan funded by paycheck withholdings and company matches. At one point the stock was so expensive that many employees could never accumulate the price of a single share of stock! Or at least it took a long time to do so. Even at a "normal" increase measured in percent, the dollar amount of the increase kept running away from the amount accumulated.

The company had a stock split (one of many) and everyone was happy.
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Re: Why do a 5:4 stock split on a $31 stock?

Postby Grt2bOutdoors » Fri May 10, 2013 9:00 am

Busting Myths wrote:
Grt2bOutdoors wrote:
danwhite77 wrote:Probably because some investment bankers (who sold the idea to the company) will get paid lots of money to do so.


Do you know anything at all about the company? Have you read the financial statements? It's annual report is one of the cleanest and thinnest reports out there - it's a water utility and growing very nicely I might add. Who knew, a boring water utility actually makes money because heck, where else are you going to go? It's the ultimate "captive" customer base out there.


Danwhite is right. Stock splits do not result in a change in value of your holding so why go through the process if it does not add value to the company?


It adds value to those who wish to purchase one share for $25 as opposed to not being able to purchase any at all because the stock price is too high. It actually encourages more purchases even if fundamentals may or may not warrant it. As I've said before, I actually own this particular company, but even with the split, I would not be purchasing it now - the p/e is too high - 22 for a water utility. No, I'll just hold.
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