Summary 

• A stock split, a company can lower its share prices and creates more liquidity that attracts small and new investors.
• A reverse stock split is often used by company to meet the minimum requirements to remain listed on an exchange.
• In both the cases the number of outstanding shares changes, but the underlying value of the company remains the same.

Listed companies split their shares, where each share is divided into two or more shares. This happens when a company feels its share price is too high or too low. Through a stock split, a company can lower its share prices and creates more liquidity that attracts small and new investors. The opposite, a reverse stock split can help company to increase their share prices and help preserve its listing on a major stock exchange.

A reverse stock split is often used by company to meet the minimum requirements to remain listed on an exchange.

In both the cases the number of outstanding shares changes, but the underlying value of the company or the market capitalisation remains the same.

StockSplit: Explained

A stock split is when a company’s board issue additional outstanding shares and increase shares of stock to its current shareholders without diluting the value of their holdings. However it lowers the individual value of each share. 

Let’s take an example; you have one share of a company. If the company opts for a 2-for-1 stock split, the company will offer an additional share with a value at half the amount of the original share. After split the value of two shares will be same as the one share.

 If the company announces 4-for-1 stock, the shareholder will receive 3 additional shares, however, the price of the original share will be divided by four. 

Reverse Stock Split: Explained

Reverse stock split is used by company to reduce the number of outstanding shares and increase the price of its shares.

Let’s take an example; if you have 10 shares of the company and its board has announced a 2-for-1 reverse stock split. Then you will end up with 5 shares, however the total value of the shares will remain the same but the value of each share will increase.

What does a Stock Split mean for a company

A stock split increases the number of outstanding shares of a company and lowers the stock price, but it does not affect the market capitalisation of the company as market capitalisation is equal to number of outstanding shares multiplied by price of a share. The number of outstanding shares go up due to split but the price also gets reduced.

However, the increase in liquidity and ability of investor to purchase the company’s shares may increase the market capitalization of the company with increase in prices of the split shares.

What happensto dividends

After stock split the dividend decision depends on the board of the company. If the company decides to keep its dividend steady, its next payout would split same as their stock splits.

What does a Stock Split mean for the Stock Market?

In most cases, a stock split has no impact on the broader stock market. The index followed by the investors and portfolio managers, is weighted by the company’s market value, so a split has no impact. 

What does a Stock Split mean to investors?

As stock split doesn’t change the underlying value of investor’s holdings, but investor may notice an increase in the number of shares in their investment portfolio.

Stock split increases the liquidity and decreases the price of the share which might motivate other investor to purchase shares. So, the ability of more investor to purchase shares can bump up its price and which in turn may actually increase the market valuation of the company.

Why companies are not opting for it

In the past, companies were more likely to split their shares because of the mechanics of trading. As it was not powered by the fast-moving digital systems and share prices were high for small investors.

But with the widespread of fractional investing as it allow investors to buy a company’s share virtually at any price point. Experts believe that in future stock split will become less popular.

Which FTSE companies have gone for stock split recently?

1. RENEWI PLC (LON: RWI)

Renewi plc is a UK-based leading waste to Product Company that turns residual materials into secondary raw materials. The company use innovative and latest technology to turn waste into useful materials such as glass, metal, paper, wood, plastic, compost, building materials and energy.

On 19 July 2021, Renewi said that it would split its share in 1-for-10 share consolidation; the company’s issued share capital consisted of 80,023,674 ordinary £1.00 shares with voting right.  

As on 23 July 2021, the company’s share price was 544 GBX which was up by 0.37% and its market capitalisation was £436.93 million. 

2. PETRO MATAD (LON:MATD)

Founded in 2005, Petro Matad is the parent company of a group focused on oil exploration, development and production in Mongolia.

On 14 July 2021, Petro Matad announced that they are following 1.021-for-1 share consolidation; the company has raised gross proceeds of US$ 9.7 million through the oversubscribed placing of 200,624,830 new Ordinary shares at price of 3.5p per share. Further the company proposed retail offer of 14,285,714 new Ordinary Shares at 3.5 p per share, which raised gross proceeds of around US $0.7 million.

As on 21 July 2021, the company’s share price was 3.08 GBX down by 0.49% and its market capitalisation was £26.29 million.

3. ILIKA PLC (LON: IKA)

Founded in 2004, Ilika plc is an advanced solid-state battery company. Its headquartered is located in UK and has operations in USA, China and Israel.

On 12 July 2021, Ilika announced that they are following 1.002-for-1 share consolidation; the company launched proposed placing of 12,846,428 new ordinary shares of one penny each at a price of 140 pence per share raising gross proceeds of approx £18m. Further the company proposed Retail offer of 2,142,857 new ordinary shares at the issue price, raising gross proceeds of approx. £3 million.  As on 23 July 2021, the company’s share price was 156.50 GBX down by 2.96% and its market capitalisation was £211.34 million.

4. ESSENSYS PLC (LON: ESYS)

Founded in 2006, Essensys plc is a leading global provider of mission critical SaaS platform and on-demand cloud services. On 8 July 2021, Essensys announced that they would go for 1.001-for-1 share consolidation; the company proposed to raise around £2 million through an open offer pursuant to which shareholders can subscribe to 701,755 open shares at a price of 285 p per share.

As on 23 July 2021, the company’s share price was 300 GBX and its market capitalisation was £159 million.

5. PENNON GROUP PLC (LON: PNN)

Founded in 1989, Pennon group plc is a UK-Based environmental infrastructure and customer services company. It provides Water and wastewater services and Water Retail services.

On 5 July 2021, Pennon announced that they are following 1-for-1.5 share consolidation; the company consisted 281,417,831 ordinary shares for 61.05p each. It holds 5,628 ordinary shares in its treasury. Currently, the total voting rights in the company is 281,412,203 shares.

As on 23 July 2021, the company’s share price was 1,250 GBX, up by 0.81% and its market capitalisation was £3,489.51 million.