Stock Splits -2: Psychology Of Split Often Moves Stk Higher

Dow Jones Newswires

Many analysts attribute the increased number of stock splits this year to the continued gains in the market and to the number of companies whose stock price had reached the magic $100 level, a popular point for stock-splitting.

One reason companies often split when the price crosses the three-digit line is to make the stock more available - that is, apparently more affordable - to smaller individual investors. Price-shy investors might find Dell, at more than $126 a share, a bit rich for their blood. But after the planned 2-for-1 stock split, with the price cut in half, the stock may look like a bargain.

"A lot of smaller retail investors may think a stock priced at $50 is more likely to double than one priced at $100 and the fact of the matter is, it's absolutely irrelevant," said Yossi Lipsker, a senior research analyst at Roger Engemann & Associates. The Pasadena, Calif., investment management firm is a unit of Phoenix Duff & Phelps Corp. (DUF) of Hartford. "But when there is a stock split, you usually see a rush of smaller investors come in."

And while no manager argues that a stock split provides any economic or financial gain, the psychology that may be behind it can and often does move the stock higher.

That psychology - investors' belief that a stock split is an assertion by management that it expects the company's earnings momentum to continue - is particularly critical for many of these larger-cap names right now. Just last fall, the earnings momentum of such companies as Dell and Gillette was questioned because of the potential impact of the crisis in Asia.

"The earnings growth of many of these companies was in doubt. But now we've got the management splitting the stock and increasing the dividends. That's a sign they've got confidence in future earnings," said David Brady, manager of the $600 million Stein Roe Young Investor Fund in Chicago.

But Brady cautioned that not every stock split should be interpreted as a good signal. "If the management is splitting the stock more than twice in one year it looks like they're trying to hype the stock," he said. "That would be a red flag."

-By Julie Creswell; 201-938-2047; julie.creswell@cor.dowjones.com