Well life can humble you sometimes. I'm writing this a few years after expressing on how confident I was about MCD splitting its shares. You can see the post here.. http://www.insomniacinvestors.com/2010/12/mcdonalds-corporation-will-this-stock.html
My initial thoughts in 2010 have proven wrong so far. Now a few years have gone by, and without a doubt McDonald shares are selling above the usual share price which would have sparked a split in the past. This situation has me intrigued with another question in mind and one to consider from another perspective. Why hasn't MCD split considering it would have split in the past? Here are some of the reasons which may be in consideration for McDonalds or any company.
Cost: Splitting shares adds cost as you pay a small fee per outstanding share. You have the added legal fees of writing up the split, redoing the financials, trading cost and other cost. Let's say for argument purposes that the cost is only $10,000, That's a lot of Value meal sales, and in a business like McDonalds where they watch the pennies, why spend the extra amount when you don't have the need. I don't doubt splitting shares has a bigger cost than 10k and so the savings probably is more.
Investors: Do you believe McDonalds wants traders or investors buying shares? I believe the Warren Buffett effect has everything to do with finding fellow investors and avoiding speculators. By keeping the share prices high in theory you reduce the volume count and the volatility of the stock. If you are a trader, volatility is where you make your money, if you are an investor, long term growth is the be all. Real investors are not buying a stock based on whether it is a $10 stock or a $1000 stock, they are buying based on ROI, P/E, Book Value, FWD P/E, EBITDA, revenue, and other financial information. As an investor I choose steady growth over volatility any day of the week. This I believe is the main reason McDonalds has not split its shares.
Ego: Although Buffett states he never split Berkshire stock because of the kind of investor it brings in and the type of investor it keeps out, never forget about ego!! Ego is what makes a person say I ran the company when the stock hit $100 or as in old Mr. Buffetts case, "$100,000". I can see the pride a CEO would exude about hitting new highs and simply looking down on the competition and seeing it nowhere near its mark. It is the Mt.Everrest effect. Let's climb to the top so we can say we did it. How high can you go! Ego plays a part in every persons decision and lets not forget a company has ego of its own.
Benefit: From a traders perspective the initial jump created by a stock split is a money making proposition. From a company perspective you just added a small jump to your stock but it usually means bringing in more fidgety investors and/or misinformed investors who believe a $50 stock for a company means it is cheaper than a $100 company when a $50 stock can be worth billions more. Usually the added effect and the so called confidence effect last only as long as your next few quarters of earnings. The benefit is very small, temporary and doesn't add long term value for the companies shareholders. It comes down to adding cost and creating no real value by splitting now days.
Past: Before discount brokers you had to basically buy stocks by the 100's or pay a premium to invest in smaller amounts, this has changed and the old benefit of keeping stock cheaper for an investor has gone away.. Now it can cost $5 for a trade of 100 shares, 10 shares or even 1000 shares. You no longer need to keep the stock in the $40 to $50 price range many companies of old preferred to keep stock prices at so people could afford to buy 100 shares. In the past a stock split was a good thing, now a high price is something to beat your chest about. Look at Goog, AAPL, or BRK.A for example.
So there you go.. Just a few reasons why MCD might not ever split its stock again, the benefits of old have diminished and the benefit of finding real investors has increased. Of course this usually means tomorrow might be the day MCD announces a split!
My initial thoughts in 2010 have proven wrong so far. Now a few years have gone by, and without a doubt McDonald shares are selling above the usual share price which would have sparked a split in the past. This situation has me intrigued with another question in mind and one to consider from another perspective. Why hasn't MCD split considering it would have split in the past? Here are some of the reasons which may be in consideration for McDonalds or any company.
Cost: Splitting shares adds cost as you pay a small fee per outstanding share. You have the added legal fees of writing up the split, redoing the financials, trading cost and other cost. Let's say for argument purposes that the cost is only $10,000, That's a lot of Value meal sales, and in a business like McDonalds where they watch the pennies, why spend the extra amount when you don't have the need. I don't doubt splitting shares has a bigger cost than 10k and so the savings probably is more.
Investors: Do you believe McDonalds wants traders or investors buying shares? I believe the Warren Buffett effect has everything to do with finding fellow investors and avoiding speculators. By keeping the share prices high in theory you reduce the volume count and the volatility of the stock. If you are a trader, volatility is where you make your money, if you are an investor, long term growth is the be all. Real investors are not buying a stock based on whether it is a $10 stock or a $1000 stock, they are buying based on ROI, P/E, Book Value, FWD P/E, EBITDA, revenue, and other financial information. As an investor I choose steady growth over volatility any day of the week. This I believe is the main reason McDonalds has not split its shares.
Ego: Although Buffett states he never split Berkshire stock because of the kind of investor it brings in and the type of investor it keeps out, never forget about ego!! Ego is what makes a person say I ran the company when the stock hit $100 or as in old Mr. Buffetts case, "$100,000". I can see the pride a CEO would exude about hitting new highs and simply looking down on the competition and seeing it nowhere near its mark. It is the Mt.Everrest effect. Let's climb to the top so we can say we did it. How high can you go! Ego plays a part in every persons decision and lets not forget a company has ego of its own.
Benefit: From a traders perspective the initial jump created by a stock split is a money making proposition. From a company perspective you just added a small jump to your stock but it usually means bringing in more fidgety investors and/or misinformed investors who believe a $50 stock for a company means it is cheaper than a $100 company when a $50 stock can be worth billions more. Usually the added effect and the so called confidence effect last only as long as your next few quarters of earnings. The benefit is very small, temporary and doesn't add long term value for the companies shareholders. It comes down to adding cost and creating no real value by splitting now days.
Past: Before discount brokers you had to basically buy stocks by the 100's or pay a premium to invest in smaller amounts, this has changed and the old benefit of keeping stock cheaper for an investor has gone away.. Now it can cost $5 for a trade of 100 shares, 10 shares or even 1000 shares. You no longer need to keep the stock in the $40 to $50 price range many companies of old preferred to keep stock prices at so people could afford to buy 100 shares. In the past a stock split was a good thing, now a high price is something to beat your chest about. Look at Goog, AAPL, or BRK.A for example.
So there you go.. Just a few reasons why MCD might not ever split its stock again, the benefits of old have diminished and the benefit of finding real investors has increased. Of course this usually means tomorrow might be the day MCD announces a split!
A picture of me and my daughter in front of American National Headquarter.
(My daughter is a shareholder of the company and I have been a share holder since after IKE took the stock down to almost nothing)
