You would think that a rising share price could only be good news for a company and its shareholders. But not always. In some cases shares can get so costly that it is difficult for new investors to buy in.
If you wanted to buy a single share in investing guru Warren Buffett’s company Berkshire Hathaway, for example, you would have to fork out $500,000 (£380,000) – more than the average cost of a house – if you bought one of the original A class shares. Even its cheaper B class shares cost more than $350 each.
To counter the problem of rocketing prices, companies sometimes carry out a share split, which means slicing each share into smaller bite-size pieces. In a five for one share split, for example, every shareholder would receive five shares for every one they already hold. The value of their total holding would not change.
So, for example, if an original share was worth £100, each of the five new shares would be worth £20.
Divided: California-based giants Google and Amazon are doing a share split
Amazon is planning a 20-for-1 share split in June. The cost of one share is currently $3,260. At this price, the new shares would cost $163. Google’s parent company, Alphabet, is carrying out a similar share split in July. The cost of one share is currently $2,781. At this price, the new shares would cost $139.
In the UK, investment trust Temple Bar is planning a five-for-one share split next month. Shares are currently trading at £11.60 so at this rate the new shares would cost around £2.32.
What does it mean for existing investors?
A share split cannot take place until it has been approved by shareholders. Even then, it can take some weeks or even months to get the go-ahead. Investors who hold shares on an online platform will not notice any difference as the value of their holdings should not change. However, anyone who holds shares directly may wonder what is going on.
Jason Hollands, managing director at wealth manager Bestinvest, says: ‘Investors who hold paper share certificates will receive new ones in the post and might wonder what is going on if they haven’t followed the news.’
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), says that there may be a small disruption in the availability of information while the split takes place. ‘It can take data providers up to 24 hours or so to process a share split,’ she says. ‘There is a lot of data to get right and it can take some time.’
How do shareholders benefit from the split?
New investors may find that a lower price makes buying shares more affordable. But a share split can also be good news for existing shareholders.
Many investors like to grow their wealth by reinvesting dividends they receive from their holdings to buy new shares. However, this is out of the question when the share price is particularly high. Joe Bauernfreund is manager of investment trust AVI Global Trust which carried out a share split in January. He says: ‘When investors choose to reinvest their dividends, if the unit price is high then a portion may be left not reinvested as it is not enough to buy a whole share.’
James Carthew, head of investment companies at financial information group QuotedData, adds that one of the trusts he holds in his own investment portfolio – Personal Assets – has a high share price (just below £504). It means he does not reinvest his dividends.
He adds: ‘Investors might reasonably want to tick a box to say ‘please reinvest my dividends’ but with the share price that high it just doesn’t work. I take my dividend as cash and invest it in other shares – Personal Assets loses out as a result.’
Does a split mean it’s a good time to buy?
Opinion is divided on whether a company splitting shares is a signal to buy or sell.
Some believe that a share split can push up the value of a company because it broadens its appeal to a greater number of investors who were previously priced out.
Investment trust Pantheon International split its shares in November last year when they reached £30. Helen Steers, senior manager, says: ‘Investors should think of it as a mechanism through which the directors were able to try to broaden the appeal of the trust.’ Pantheon shares are now trading at £3.21 after a ten-for-one stock split.
However, other investment experts warn that investors should proceed with caution as a decision to split shares tends to come once they have already risen sharply in value.
‘The danger is that share prices tend to get bloated after long upward runs, so stock splits can sometimes be a signal of a stock market top,’ says Russ Mould, investment director at wealth manager AJ Bell.
As always, your decision to buy should be based on your happiness with the company’s strategy and financial strength – or underlying investments and expertise if it is an investment trust. The unit price of an individual share should not be a signal to buy or sell.
A high share price doesn’t equal quality
As Mould infers, a high share price can be a sign that a company has become successful. However, QuotedData’s Carthew believes it should be taken with a pinch of salt.
‘Prices, especially in the US, can become a bit ridiculous, especially when a company has been popular for a long time,’ he says. ‘Some see a high share price as a badge of honour. Berkshire Hathaway has created an overly complex share structure that penalises small investors just to maintain the vanity of having a high share price.’
Carthew adds that share prices in the UK tend to be more restrained, usually in the range of about 50p to £20. ‘When share prices get too big, companies tend to subdivide their shares, and when they get too small, they often consolidate them,’ he says.
Other ways to buy expensive shares
Buying into a fund or investment trust allows you to own a small holding in companies with high share prices without forking out for a whole share.
Your money is pooled with thousands of other investors to buy a portfolio of tens, hundreds or even thousands of holdings.
Some share-dealing platforms now allow you to buy fractions of shares. They are more popular in the US, where high share prices are more common. However, a few, such as Freetrade and Trading 212, have entered the UK market.
If you buy fractional shares, you should be able to sell them again on the same platform. You will also be entitled to a corresponding share of dividends.
Not all providers that allow trading in fractional shares let you hold them in a full range of tax-efficient wrappers. For example, trading 212 does not offer a self-invested personal pension.
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