When Dollarama Inc. concluded a stock split last week, the discount retailer may have signalled bullish confidence in its financial performance. So why aren’t Canadian banks, some of them with shares trading at more than $100, making similar moves?
Stock splits are essentially cosmetic changes, of course. They increase the number of outstanding shares and decrease the price of each share, leaving investors with a holding that is unchanged in value.
In the case of Dollarama, its stock was split three-for-one, from $153.49 to $51-and-change. If you ended the day on June 19 with 100 shares valued $15,349, you awoke on June 20 with 300 shares valued at the same amount.
So why did the retailer bother?
More shares outstanding can make it easier for traders to buy and sell large holdings, which can attract long-term institutional investors and broaden a company’s shareholder base.
As well, a Dollarama spokesperson noted that a stock priced above $100 is a psychological threshold.
In other words, some investors (especially small investors who prefer to make purchases in 100-share lots) could be deterred from buying shares, or even holding them, if the price appears too lofty. Dollarama also split its shares, two-for-one, in 2014 when the price rose above $100.
In an e-mail, Dollarama spokeswoman Lyla Radmanovich added: “Basically, by end of March [when the stock split was announced], the stock had been hovering at around $150 for some time. The Board [of directors], which had been reviewing the question of a stock split on an annual basis, decided it would make sense to proceed with this proposal at that time, to make the shares more accessible and potentially improve liquidity.”
Ms. Radmanovich didn’t mention why investors should take notice when companies split their stocks: If splits signal confidence in a company’s prospects among insiders − why split the stock if you fear the share price could collapse? − the shares should perform well.
For what it’s worth, Dollarama’s share price has rallied more than 5 per cent in the three trading days since the split was completed.
Not all companies split their shares. Berkshire Hathaway Inc. is a notable holdout: Its “A” shares traded at more than US$286,000 on Friday, up from US$19 in 1964. Berkshire’s chief executive, Warren Buffett, believes that letting the share price rise into the stratosphere attracts long-term investors and dissuades active traders.
But Canada’s big banks − among the most widely held stocks by mutual funds and individual investors − are not opposed to stock splits, based on history. They have generally announced splits when their shares approached $100, often with good results for investors who bought or stayed put.
Toronto-Dominion Bank last did it in 2014; its shares rose over the next 12 months, suggesting the stock split coincided with a good operating environment for banks. Bank of Nova Scotia did it in 2004; its shares rallied 19 per cent.
Right now, Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce all trade above $100.
Are splits on the way? It makes sense − although I argued that they were in early 2017, when RBC, BMO and CIBC looked to be obvious candidates. Since then, no stock splits have been announced, and the shares have only risen higher.
CIBC’s CEO, Victor Dodig, cast doubts on stock splits when he said during the bank’s annual general meeting last year that he doesn’t believe the practice creates value. Leaving the stock alone, he added, helps investors track the bank’s progress.
CIBC had nothing to add to Mr. Dodig’s comments when contacted on Friday. BMO couldn’t be reached for comment. And, vaguely, RBC said that it will continue to act in the best interests of its shareholders.
But with Dollarama demonstrating that boards of directors still see an upside to stock splits, and bank stocks cruising near record-high levels amid solid economic conditions and gargantuan profits, don’t rule out stock splits yet.