A stock split is a corporate action where a company distributes additional shares to its existing shareholders, resulting in an increase in the total number of outstanding shares. The company’s overall market value is unaffected by this action. Instead, it adds more slices to the existing pie, bringing the share price down. The total market value (the size of the pie) stays the same, but each slice (or portion) gets smaller.
Palo Alto Networks’ Stock Split
After going over the fundamentals of a stock split, let’s examine a recent real-world example: the 3-for-1 stock split at Palo Alto Networks. The decision to divide its shares was a first for the cybersecurity expert, who is renowned for offering comprehensive answers to the escalating cybersecurity threat.
The business announced the stock split along with its financial results for the fourth quarter of its fiscal year, which concluded on July 31. The company’s board of directors approved a stock dividend that would result in a 3-for-1 stock split of its common shares. For each share possessed after the close of business on September 13, each owner of record as of the close of business on September 6 would get two more shares. On September 14, the stock’s split-adjusted trading period got underway.
Each Palo Alto Networks stock traded for about $570 prior to the split. Investors had three shares at $190 apiece after the split. As a result, an investor who previously owned one share at $570 now owns three shares worth $190 each, preserving the same $570 total investment value.
Before and After the Split
[table id=290 /]
The company has been performing exceptionally well in terms of business, which has resulted in a significant increase in the stock price. The shares have gone up by 55% in the past year, and there has been a remarkable increase of 179%, 3,305%, and 801% in the preceding three-year, five-year, and ten-year periods, respectively.
Frequently Asked Questions
What happens to my dividends after a stock split?
Dividends are typically adjusted proportionally after a stock split. If a company pays a sure dividend per share before the split, the dividend amount per post-split share will decrease accordingly.
Can a stock split signal positive performance for a company?
While a stock split can generate interest and indicate a company’s growth, it does not directly guarantee positive performance. The stock split alone should not be the sole factor in assessing a company’s prospects.
Are all stock splits done at a 2-for-1 or 3-for-1 ratio?
No, stock splits can occur at various ratios. Although 2-for-1 and 3-for-1 are common ratios, companies can choose different multiples, such as 4-for-1 or 5-for-1, depending on their specific goals and circumstances.
What happens if I own fractional shares after a stock split?
If the total number of shares owned is not evenly divisible by the split ratio, fractional shares may occur after a stock split. Certain brokerages offer the option to sell fractional shares and subsequently provide investors with the resulting proceeds.
How does a reverse stock split differ from a regular stock split?
A reverse stock split is a corporate action that involves the consolidation of multiple shares into a single share, leading to a decrease in the total number of outstanding shares.
