Using division to multiply stocks

A Westvaco Company shareholder woke up last Wednesday morning to read that his 1,000 shares of stock will become 1,500 shares by late September. This increase will occur because the New York-based paper and printing company has declared a 3-for-2 stock split and raised its quarterly dividend by 20 percent.

The bull market, which took a breather this week by closing down 70.15 points at 2639.35, has created a bull market in stock splits. Standard & Poor's Corporation this year has counted 159 splits of 3-for-2 among companies listed on the New York Stock Exchange.

Other splits announced in 1987 include Exxon Corporation's 2-for-1 in April and Centel Corporation's 3-for-2 two weeks ago.

``We're looking for a record number this year,'' says Joseph Tigue, assistant managing editor of The Outlook, S&P's weekly advisory publication. He says he wouldn't be surprised to see 250 splits; the previous record was 225 in 1983.

A stock split is characteristic of a bull market, explains Robert Hamada, deputy dean and professor of finance at the University of Chicago's Graduate School of Business. The most common stock splits are 2-for-1 and 3-for-2. With a 2-for-1 split, for example, a person who owns 100 shares of stock at $100 a share by a date set by the company receives 200 shares worth $50 a share at a later date. While the stock's monetary value has not changed, the number of shares has doubled. Many times stock splits go hand in hand with dividend increases.

Because many companies are also buying back stock this year, more splits may occur next year as prices of those stocks rise, predicts William Tiritilli, vice-president for research at Rodman & Renshaw Inc., Chicago.

Stock splits occur for a number of reasons. They are intended to send positive signals to shareholders and the investing public. ``The split calls attention to the earnings' progress, and it signals the management's confidence in the future and may result in buying,'' observes Mr. Tigue.

A stock split technically provides no advantage to shareholders, ``but people view it as a positive sign, because of the expectation. The stock doesn't split if the company isn't doing well,'' Tigue notes.

The main motivation for splitting stock is to make the stock more affordable to a broader base of individual shareholders, says Donna Smith, director of investor relations at Monsanto in St. Louis. ``Stock splits don't necessarily affect institutional investors,'' she explains.

Because a split makes a stock's price attractive, more people can buy more stock. ``You accelerate the supply and demand,'' says Eugene Peroni, vice-president and director of technical research at Janney Montgomery Scott Inc., Philadelphia.

Companies tend to split stocks once they pass the $100 a share threshold, he says. ``We're seeing many stocks crossing $100 now,'' Mr. Peroni observes.

Peroni estimates that 85 percent of the 1,500 stocks he follows on the New York Stock Exchange and American Stock Exchange have moved up appreciably within two or three months after they split. ``Stock splits are a reflection of and a driving influence of the bull market,'' he concludes.

S&P lists the following companies as split candidates: Merck & Company Inc., Monsanto Company, Pfizer Inc., Raytheon Company, Royal Dutch, Walt Disney Productions, and Digital Equipment Corporation.

In considering a stock as a split candidate, analysts look at previous splits, higher market price, and dramatic growth in the last year or so, Tigue says.

Companies generally are reluctant to comment on the possibility of a split, because, for one thing, stock prices sometimes move up in anticipation of a split. Peroni cites the example of Ford Motor Company's stock, which dropped from $96 a share to $88 a share this spring when a weak market combined with the company's nonannouncement of an anticipated stock split. ``But now Ford is back up,'' he observes.

Some companies are not as concerned about broadening their shareholder base as they are about other effects a stock split might have, says a spokesman at a major company.

``If the objective of a stock split is to spread the shareholder base, then a company would get the stock price into a range that people can afford. Not all companies agree with that, however,'' he says.

``Before you'd make a split, you'd want to be sure that market conditions won't worsen, and that the price won't drop into a range that's uncomfortable,'' he adds.

Professor Hamada notes that in the 1950s and 1960s some companies let the prices of their stocks climb, rather than split. Even now, splits are not always the right course of action. ``If a firm is not particularly concerned, there's no urgent reason why it should split stocks,'' he says.