Ever wondered why do companies like MRF don’t split the stock? If you check the current market price of MRF Share, it’s hovering at a whopping price of Rs 84,470 per share. Its all-time high for the last 52 weeks is Rs 98,599. Even though the price of one share is too high for this company, the interesting question here is why the MRF’s management/promoters are not splitting its shares? After all, buying a stock at Rs 84,470 per share is not financially viable for most retail investors.
In this article, we are going to answer the same. Here, we are going to discuss why companies like MRF don’t split the stock. However, before we discuss these expensive stocks, let’s first study why companies split their stocks?
Quick Note: If you are do not know what is stock split and bonus shares, then check out this post first- Stock split vs bonus share – Basics of stock market
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An Interesting study on companies that Rapidly Split Stocks in Past
You might have heard about the wealth creation story of Infosys. A small investment in the 100 shares of Infosys in 1993 would be worth over Rs 6.04 crores by now. (Also read: How to Earn Rs 13,08,672 From Just One Stock?)
In the last 25 years, Infosys has given multiple bonuses and stock splits to its shareholders. And, that’s why the share price of Infosys is still in the affordable purchase rate for the average investors. In fact, if Infosys has not given so many bonuses and splits, the price of one share of Infosys might have been over multiple lacks by now. Here is the bonus and split history of Infosys from 1993 till 2018:
Besides, Wipro is another common stock with a similar story. Because of its consistent bonuses and splits, the Wipro share is still in the purchase range for the retail investors. Else, if the management had decided not to give any split or bonus, then the share of Wipro might also have been over multiple lakhs and maybe over crores by now. (Also read: Case Study: How 100 shares of WIPRO grew to be over Rs 3.28 crores in 27 years?)
The big question – Why do companies split a share?
Here are four common reasons why companies split their shares-
Stock splits help the companies to make the share price affordable for retail investors. For example, if a company is trading at a share price of Rs 3000 and it offers a stock split of 10:1, then it means that its price will drop to Rs 300 per share after the split. Now, which price is more affordable to the public- Rs 3,000 or Rs 300? Obviously, Rs 300.
The stock split makes the stock more liquid and hence increases its trading volume. This is because the total number of outstanding shares increases after the stock split.
Splitting a stock does not affect the financials of a company. Although the outstanding shares of the company will increase after the split, however, the face value will decrease in the same proportion. Overall, stock splits don’t affect the financials and hence the companies are willing to go for it.
As small and retail investors are more interested in affordable shares, stock splits help in increasing their participation and overall helps the companies to build a broadly diversified investor base for their stock.
Overall, in terms of value, the stock split doesn’t matters much as the financials of the company remains the same. However, by splitting the shares- the company is able to keep the shares affordable to the public and hence maintains a wide ownership base.
Companies that do not split their shares – List of few Costliest Shares!
The reasons to split shares might be clear by reading the above paragraph. However, the next big question is why few companies do not split their shares? Why the share price of many stocks in the share market is still in the 5 figures if they have an option to split their stocks.
If you check the current market price of the companies listed on the Indian stock exchange, you can find out that there are many companies whose share price is above Rs 5,000. Here are a few of the top ones: CompanyIndustry Market Cap (Rs Cr)Current Price (Cr) MRF Ltd.Tyres & Allied35528.2983770.55 Honeywell Automation India Ltd.Consumer Durables - Electronics39314.5844465.85 Rasoi Ltd.Consumer Food303.231387.65 Page Industries Ltd.Textile33131.1929703.75 3M India Ltd.Diversified30843.2527379.55 Shree Cement Ltd.Cement & Construction Materials97260.3526956.3 Nestle India Ltd.Consumer Food159994.6516594.25 Abbott India Ltd.Pharmaceuticals & Drugs31139.5814654.4 Bosch Ltd.Auto Ancillary42343.1314356.7 The Yamuna Syndicate Ltd.Trading433.3514099 Tasty Bite Eatables Ltd.Consumer Food3559.8213873.05 Procter & Gamble Hygiene & Health Care Ltd.Household & Personal Products42288.0613027.45 Bombay Oxygen Investments Ltd.Industrial Gases & Fuels153.7410249 Bharat Rasayan Ltd.Pesticides & Agrochemicals4082.519608.75 Bajaj Finserv Ltd.Finance - Investment149727.659408.7 Polson Ltd.Chemicals106.638885.9 Paushak Ltd.Chemicals2479.928046.15 Indiamart Intermesh Ltd.e-Commerce24265.637991.65 Sanofi India Ltd.Pharmaceuticals & Drugs17683.377678.2 TTK Prestige Ltd.Consumer Durables - Domestic Appliances10043.827231.65 Maruti Suzuki India Ltd.Automobiles - Passenger Cars214573.517103.2 Lakshmi Machine Works Ltd.Textile - Machinery7439.486963.85 Atul Ltd.Chemicals20425.576903.55 Ultratech Cement Ltd.Cement & Construction Materials194197.976728 Procter & Gamble Health Ltd.Pharmaceuticals & Drugs10543.516351.75 Wabco India Ltd.Auto Ancillary11639.556136.55 Kama Holdings Ltd.Plastic Products3556.685512 Hawkins Cookers Ltd.Consumer Durables - Domestic Appliances29125507 Gillette India Ltd.Household & Personal Products17895.315491.85 Bajaj Finance Ltd.Finance - NBFC324743.365389.15 Alkyl Amines Chemicals Ltd.Chemicals10885.795332.85 Schaeffler India Ltd.Bearings16580.545303.95 Affle (India) Ltd.Telecommunication - Equipment13510.525299 SRF Ltd.Diversified31296.585282.55 Blue Dart Express Ltd.Courier Services12436.885241.45 Bayer CropScience Ltd.Pesticides & Agrochemicals22897.555094.9
Quick Note: The above prices and values are updated till March 2021!
All these shares are not easily affordable for the average retail investor. Even the shares of Maruti are trading at a current price of above Rs 7,100.
Why Do Companies Like MRF Don’t Split the Stock?
Here are a few common reasons why few companies do not split their shares:
1. They are already doing good. Why bother to split?
Many of these companies are already good. Then, why should they bother to split the share and make it cheap?
For example- MRF was trading at a share price of Rs 6,358 in March 2010. Currently, as of March 2021, it is trading at Rs 84,470. The people might have argued that the stock was expensive and not affordable even in 2010. However, it has done pretty well in the last 11 years and given a return of over 1,100% to its shareholders.
In short, if a company is doing good, they why it should bother to go through the splitting process. It’s already making money for itself and its investor, even when the share price is expensive.
2. No financial benefits
There are literally no financial benefits while splitting the shares. The value of the stock remains the same after stock splitting (the financial statements and ratios don’t change). That’s why until and unless the promoters have any good enough reason, the share splitting does not appeal much to the management and promoters.
3. Keeps Speculators away
The stock split increases liquidity and makes the stock affordable. This results in an increase in the participation of retail investors and traders. And with an increase in participation, speculation also increases. On the other hand, a high share price helps to keep the traders and speculators away from the stock. Only serious investors are the ones who can find these companies appealing and might want to enter these stocks.
Another benefit of the high share price is that it keeps the newbie investors away from them. As the new investors are mostly attracted to the affordable companies and are not willing to invest a high amount, therefore their participation is quite low in these companies.
4. Limited Public Shareholding
The high share price of a company results in limited public shareholding. Retail investors and traders can’t easily enter such stocks. Sometimes, this also helps in decreasing the volatility in the share price. Moreover, by allowing the high share price, the promoters tend to keep the voting right in their hands. This helps in maintaining a static voting right which allows the owners to make key decisions without much interference.
Besides, fewer public shareholding also helps in avoiding scenarios like creeping acquisition or in worst case hostile takeovers. Expensive stocks discourage acquisition.
5. Symbol of Status and Uniqueness
Do you know that one share of Warren Buffett’s company- Berkshire Hathaway costs around Rs 2.74 crores? Yes, that’s true. The current share price of Berkshire Hathaway Inc. Class A is $3,77,440. Similarly, MRF is known in India for such an extremely high share price.
A high share price can be sometimes regarded as a symbol of status. Splitting that share means losing this exclusiveness.
There are no specific guidelines or rules from SEBI or any stock exchange about a stock split. Therefore, the prices of the shares can go as high as they can and the company is not obliged to offer any split.
As we discussed in this article, there are both pros and cons of a high share price. The biggest advantage of a high share price is that it helps to keep the traders and speculators away from that share. Anyways, a company might choose whether it wants to split a share or not- depending on what suits them best for their interests.
That’s all for this post on Why Do Companies Like MRF Don’t Split the Stock. I hope it was helpful to you. If you still have any doubts/queries on this topic, feel free to comment below. I’ll be happy to help. Take care and Happy Investing!
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