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View Full Version : Is it better to buy a stock before or after a 2 for 1 split


Foil
Jul 17, 2012, 05:51 AM
KO is set to split 2 for1 with a record date of 7/27 (ex date 7/23?), new shares given on 8/10. If KO is currently trading at an asking price of ~77.44 and has a dividend of .51/sh would it better financially to buy it now or after the split, when it would have an estimated dividend of .26/sh at a price of ~$38-39.

2) Is the stock's price more likely to rise after the split or flounder or fall.

ebaines
Jul 17, 2012, 06:32 AM
On average the return you will get is independent of whether you buy before or after the split - it makes no difference at all. In the old days stock splits were used to lower the price so that average investors could afford to buy the stock in round hundred lot increments, so demand for the stock would rise and the price go up. But these days thanks to discount brokers there is nothing to keep investors from buying "odd lots" of just a few shares, so that argument no longer applies. If keeping the price low was such a good idea than the smart folks at Berkshire Hathaway or Google would jump on it, but instead they just let the price run up. Some argue that stock splits indicate management's confidence in the future of the company, so more people will want to buy - but if you believe that then any added "pop" in the stock price would occur when the split is announced, not after the split itself actually occurs. And of course there is plenty of evidence from the bubble bust of a few years back that management confidence may be worth very little (any former stock owners of Lucent, Nortel, Washington Mutual, Enron, etc know what I'm talking about).

As for dividend timing - as you get closer to the ex-dividend date more of the value of the impending dividend distribution is baked into the price of the stock, so if you buy just prior to ex-dividend you essentially pay more for the stock and quickly get a bit of it back in dividend. This is like swapping part of your cost basis for ordinary income, which from a tax point of view is not a good deal. This is why it is advisable to not but mutual funds immediately prior to their dividend distribution date.