What Nike, Inc.'s Stock Split Really Means

By Fool.com

Just over a month ago, Nike announced its board of directors had approved a massive four-year, $12 billion share repurchase program, raised its quarterly dividend by 14% to $0.32 per share, and approved a 2-for-1 stock split of both its class A and class B common shares.

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The trifecta of good news drove shares of the sportswear behemoth up more than 5% that day -- and with good reason. Any stock bought back and retired by Nike under the repurchase plan will serve to decrease the number of outstanding shares, increasing earnings per share and boosting the value of remaining shares owned by investors. Meanwhile, this marked the 14th consecutive year Nike has increased its payout, making Nike stock a boon for patient, long-term investors willing to let compounding do its work.

To split or not to split ...But the purpose of Nike's 2-for-1 stock split is less clear. In fact, for most investors, Nike's split means absolutely nothing.

Specifically, after market closes on Wednesday, Dec. 23, 2015, the price of both classes of Nike's common stock will be cut in half, and investors will receive one extra share of Nike stock for each share they already own. Then on Thursday, Dec. 24, Nike stock will begin trading at its new price.

Put another way, it's like taking a pie with four slices, then cutting each slice in half. Whether the Nike pie has four slices or eight, it's still the same pie. In addition, note this doesn't change Nike's valuation; by definition, Nike's per-share earnings and dividend will be adjusted to reflect the higher number of shares outstanding.

Lucky number sevenBut this is also the seventh time in Nike's history that it has instituted a 2-for-1 split, with its most recent occurring almost exactly three years ago in 2012. So why does Nike want to do it again?

For one, while Nike management didn't elaborate on the reasons for the split in their initial press release, consider the fact thatUnder Armour most recently implemented its own 2-for-1 stock split in April, 2014. When that split was announced, Under Armour CEO Kevin Plank explained, "Our team is proud of the value we have delivered to our stockholders over the long-term, and we believe this stock split may broaden our investor base and improve the trading liquidity of our stock."

So two things mentioned by Plank likely hold true in Nike's case as well: broadening the company's investor base and improving trading liquidity.

Regarding the latter, reducing the price of each share can indeed improve a stock's liquidity, primarily by allowing it to be more rapidly bought or sold without larger blocks of higher-priced shares having a significant impact on the stock trading price. Even then, however, at The Motley Fool, we place much more emphasis on long-term investing, so short-term fluctuations caused by day-to-day trading should have little bearing on our investing thesis.

Regarding the former, you can be sure Under Armour and Nike are both aware that even though their stock splits are a zero-sum game, some investors are wrongly intimidated by what they perceive to be an "expensive" stock given its "high" share price. In reality, however, taken in conjunction with any meaningful valuation metrics, Nike stock will be just as expensive -- or cheap, depending on your view -- as it was before the split.

Relatedly, some might argue reducing the per-share price makes it easier for everyday retail investors to purchase whole shares of Nike stock. But in today's investing world, many online brokerage platforms enable seamless purchases of fractional shares, negating the validity of the "whole share" argument.

The Dow effectThere is another way Nike's stock split will affect some investors, albeit less directly. Remember, Nike became one of the 30 members of the Dow Jones Industrial Average -- which itself is a price-weighted index -- a little over two years ago.

With shares of Nike up more than 90% since then as of this writing, including a roughly 40% year-to-date gain in 2015, Nike currently has the sixth biggest impact among all 30 Dow companies with a roughly 5.09% weighting in the index. After the split, Nike's impact on the Dow will fall to roughly 2.5% and, according to S&P Dow Jones Indices analyst Howard Silverblatt, will reduce the consumer discretionary sector's weighting in the index from roughly 18% to 16%.

In other words, wide fluctuations in Nike's share price after the split will have a slightly lower influence on the daily movements of the Dow. But here again, that's something that will be hardly noticeable to the vast majority of retail investors.

In the end, that's why I'm convinced Nike shareholders would be wise to ignore their company's latest stock split, and focus instead on the factors driving its underlying business.

The article What Nike, Inc.'s Stock Split Really Means originally appeared on Fool.com.

Steve Symington owns shares of Under Armour. The Motley Fool owns shares of and recommends Nike and Under Armour. 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.

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