66 firms go for stock splits

Stock splits are on the rise. The year 2003 has seen about 66 companies going for splits so far. And more than a dozen of other companies are ready to follow the suit.

Analysts point out that the market is priming up for more splits in the coming year on the back of a slew of positives.

Prices of a large number of shares are at all-time highs, and are hitting fresh highs on a daily basis.

Investor optimism is picking up and the manufacturing sector is in an expansion mode leading to strengthening of the job market. Corporate earnings too are improving.

Any news of a stock split is treated like a hot tip these days, with a lot of investors rushing to buy on the counter on hopes to make a quick buck.

But most stocks tend to lose ground after the split. That brings up the moot question: how does a stock split affect the company's valuation?

A stock split means the division of a high-priced share into a particular number of low-priced shares. For instance, the splitting of Rs 100 (face value) share into 10 shares of Rs 10 each.

Stock splits increase the number of outstanding shares and create a bigger and more active market for a company's shares.

This usually has an effect of boosting the liquidity or floating stock in the scrip as well as making the scrip more affordable to a wider range of investors.

The problem of liquidity increases when the free-float of the company is small and the promoters hold a huge chunk of the equity.

In a stock split, the equity capital does not rise; but the existing share capital is distributed among a larger number of shares. Therefore, the dividend outgo also does not increase.

Says an analyst from a local brokerage house, "Stock prices, on post-split basis, tend to settle higher if the company's fundamentals and management are of good quality and the split serves the purpose of making the stock more affordable."

He adds that splits help in distributing the shareholding pattern widely and they put to rest the fear of takeovers and stock accumulation by raiders.