Why do popular companies like MRF not announce a stock split?

Five years back, when MRF was quoting at Rs20,000, investors were expected to lose interest in the stock due to its price. Investors expressed the same wariness two years back when the stock scaled to Rs50,000.

Aug 10, 2018 12:08 IST India Infoline News Service

MRF Tyres
Let us start with a real story and then give a slightly weird twist to it. If you have been in the capital markets for some time, you would surely be aware of how an investment of Rs10,000 in Wipro in 1980 would be worth Rs550cr today. This story has been told and retold many times over. Through the last 38 years, Wipro has consistently rewarded its shareholders with bonus issues and splits. Can you imagine what would have happened to Wipro’s price today if the company had not done stock splits and bonuses through the last 38 years but had still created wealth like it has? Let us check it out!
 
Back in 1980, Wipro issued a total of 45,334 shares. Over the last 38 years, as the company has grown its business rapidly, it has issued a series of stock splits and bonuses, and as of today, the company has issued a total of 451cr shares. At the current market price of Rs280, Wipro has a market cap of Rs1,26,000cr. Now if this market cap was to be supported by the number of shares in 1980 (45,334), then each of Wipro’s shares will be quoted in the stock market at Rs2.78cr. Yes you read it right: each Wipro share would be quoted at Rs2.78cr, which is what you would be paying to buy a 3BHK flat in Mumbai’s suburbs. You can legitimately argue that had Wipro not done all these stock splits and bonuses, then retail participation and wealth creation would not have inflated to this extent. But that is beside the point! Then why don’t some companies split their stocks when they are out of reach for most small and retail investors? First off, let us understand why companies split the stock?
 
What do you achieve by splitting the stock?
  • In a way, stock split is value neutral. It increases the number of shares outstanding and reduces the par value of the share proportionately. So 100 shares with face value of Rs10 is the same as 200 shares with the face value of Rs5.
  • The big advantage of a stock split is that it brings the stock within popular trading range. Surely, if Wipro was quoted at Rs2.78cr today, not too many investors would consider buying a Wipro share. But when a share quoted at Rs2000 goes through a 5:1 stock split and starts trading at Rs400, it enters a popular range.
  • Stock splits are useful in widening and creating a broad base of individual investors. Small and retail investors are more interested in stocks that are affordable than in buying stocks that are steeply priced. Of course, in value terms that does not matter, but companies interested in maintaining a wide ownership base always focus on splitting the stock to keep it in a popular ownership range.
Why are some Indian companies not splitting their stocks?
Take the case of MRF trading at Rs78,700, Page Industries at Rs30,044, Eicher at Rs27,127, Bosch at Rs19,091, or Shree Cements at Rs17,463. Each of these stocks is trading in a price range that is unaffordable to most investors in the Indian markets. Then why do these companies not split their stock? One can argue that you cannot issue a bonus unless you have those massive accumulated reserves either in the form of a share premium or as profits ploughed back. But there is no such requirement for a stock split. Then why do companies like MRF, Page, or even Eicher not opt for a stock split to bring their stocks into a more popular trading range?
 
How an expensive MRF became more expensive…

 Chart Source: Bloomberg

Five years back, when MRF was quoting at Rs20,000, investors were expected to lose interest in the stock due to its price. Investors expressed the same wariness two years back when the stock scaled to Rs50,000. Today at Rs80,000, the stock continues to create wealth. In fact, if you had purchased MRF at Rs20,000 five years back, your wealth would have multiplied four-fold, delivering an annualized return of 32%. You surely cannot ask for more than that!
 
Five reasons why some of these companies may not be keen about splitting the stock
  • When you are doing well enough with an expensive stock, why force yourself to become cheap. The above chart only emphasises this point.
  • Stocks like MRF have had very few public shareholders, and they have probably liked it that way. As stocks split and more retail investors and traders enter the market, there is a marked rise in the volatility of such stocks.
  • Most family-owned businesses are always worried about creeping acquisitions. This kind of an expensive stock typically discourages such acquisitions.
  • When companies don’t split, the voting pattern of shares remain largely static and predictable, which is an advantage when moving through sensitive resolutions.
 
Finally, there is always a sense of exclusiveness attached to such high-priced stocks. In a way, they are like the Gucci of the stock market. Splitting the stock would be akin to losing that exclusiveness, which companies like MRF may not be too keen on.

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