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Almost exactly seven years after its 2008 IPO, Visa (NYSE: V) decided to split its shares 4-for-1, effective March 18, 2015. In its short public history, Visa's shares had already gained more than 460%, and the price had swelled to nearly $250. Here's what you need to know about stock splits -- and if Visa could split again.
Why stocks split
Generally speaking, the main reason for a stock split is a large increase in the underlying share price. In Visa's case, the stock's price had increased from its $44 IPO price in 2008 to about $248 when the 4-for-1 split was announced.
This has the intended effect of making the company's shares more accessible to smaller investors, and it also allows investors to put all of their money to work in the stock. In other words, let's say you had $1,200, and you wanted to buy Visa stock. Before the split, you would have been able to purchase four shares, with $208 left over. After the split, $1,200 would have bought 19 shares, and you would only have $22 left over. So, this investor would have been able to invest $186 more of her money thanks to the split.
What a stock split means to investors
It's important to mention that a stock split causes no fundamental change in the stock or the underlying business. Each investor still has the same equity in the company, and the valuation of the stock relative to earnings remains the same.
I already mentioned the affordability that comes with a stock split. In perhaps the most extreme example, Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) Class A shares have never split throughout Warren Buffett's tenure, and they currently trade for about $217,000, making one share prohibitively expensive for most people. However, the Class-B shares have split several times, and their $144 price tag is much more affordable for the average investor.
This also has implications for options investors, who generally buy in multiples of 100, since that's how many shares each options contract represents. Using Visa as our example, if an investor wanted to purchase 100 shares and write a covered call, this would cost $24,800 pre-split, but just $6,200 after.
Furthermore, while the split doesn't technically change anything, it can cause a stock's price to rise immediately following the split's completion. Since it does make shares more affordable, investors who avoided the stock because of its high share price can suddenly invest comfortably. This can create more demand, and therefore upward pressure on the stock's price.
Finally, investors need to remember to account for the split when assessing their performance. For example, since Visa's IPO price was $44 per share, and the stock has since split 4-for-1, investors who bought in at the IPO should compare the stock's current price to a $11 split-adjusted IPO price.
Will Visa split again?
Possibly, depending on the stock's performance going forward. Visa trades for approximately $82 as I write this, which means it has increased by 32% since the split was announced. Using the previous pre-split price of $248, this implies Visa would need to rise by another 200% or so before the company would implement another 4-for-1 split.
Visa could always decide to do things differently, though. For example, if the stock were to rise to say, $120, the company could potentially decide to do a 2-for-1 split, or it could decide to never split again no matter how high the stock climbs. There's no way to know for sure until it happens.
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Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.