You would think that a rising proportion price could only be good news for a company and its shareholders. But not always. In some situations shares can get so costly that it is difficult for new investors to buy in.
If you wanted to buy a single proportion in investing guru Warren Buffett’s company Berkshire Hathaway, for example, you would have to fork out $500,000 (£380,000) – more than the average cost of a house – if you bought one of the original A class shares. already its cheaper B class shares cost more than $350 each.
To counter the problem of rocketing prices, companies sometimes carry out a proportion divided, which method slicing each proportion into smaller bite-size pieces.
Divided: California-based giants Google and Amazon are doing a proportion divided
In a five for one proportion divided, for example, every shareholder would receive five shares for every one they already keep up. The value of their total holding would not change.
So, for example, if an original proportion was worth £100, each of the five new shares would be worth £20.
Amazon is planning a 20-for-1 proportion divided in June. The cost of one proportion is currently $3,260. At this price, the new shares would cost $163.
Google’s parent company, Alphabet, is carrying out a similar proportion divided in July. The cost of one proportion is currently $2,781. At this price, the new shares would cost $139.
In the UK, investment trust Temple Bar is planning a five-for-one proportion divided next month. Shares are currently trading at £11.60 so at this rate the new shares would cost around £2.32.
What does it average for existing investors?
A proportion divided cannot take place until it has been approved by shareholders. already then, it can take some weeks or already months to get the go-ahead.
Investors who keep up shares on an online platform will not notice any difference as the value of their holdings should not change. However, anyone who holds shares directly may surprise what is going on.
Jason Hollands, managing director at wealth manager Bestinvest, says: ‘Investors who keep up paper proportion certificates will receive new ones in the post and might surprise what is going on if they haven’t followed the news.’
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), says that there may be a small disruption in the availability of information while the divided takes place.
‘It can take data providers up to 24 hours or so to course of action a proportion divided,’ she says. ‘There is a lot of data to get right and it can take some time.’
How do shareholders assistance from the divided?
New investors may find that a lower price makes buying shares more affordable. But a proportion divided can also be good news for existing shareholders.
Many investors like to grow their wealth by reinvesting dividends they receive from their holdings to buy new shares. However, this is impossible when the proportion price is particularly high. Joe Bauernfreund is manager of investment trust AVI Global Trust which carried out a proportion divided in January. 2
He says: ‘When investors choose to reinvest their dividends, if the unit price is high then a portion may be left not reinvested as it is not enough to buy a whole proportion.’
James Carthew, head of investment companies at financial information group QuotedData, adds that one of the trusts he holds in his own investment portfolio – Personal Assets – has a high proportion price (just below £504). It method he does not reinvest his dividends.
He adds: ‘Investors might reasonably want to tick a box to say ‘please reinvest my dividends’ but with the proportion price that high it just doesn’t work. I take my dividend as cash and invest it in other shares – Personal Assets loses out as a consequence.’
Does a divided average it’s a good time to buy?
Opinion is divided on whether a company splitting shares is a signal to buy or sell.
Some believe that a proportion divided can push up the value of a company because it broadens its popularity to a greater number of investors who were before priced out.
Investment trust Pantheon International divided its shares in November last year when they reached £30. Helen Steers, senior manager, says: ‘Investors should think of it as a mechanism by which the directors were able to try to enlarge the popularity of the trust.’ Pantheon shares are now trading at £3.21 after a ten-for-one stock divided.
However, other investment experts warn that investors should proceed with caution as a decision to divided shares tends to come once they have already risen severely in value.
‘The danger is that proportion prices tend to get bloated after long upward runs, so stock splits can sometimes be a signal of a stock market top,’ says Russ Mould, investment director at wealth manager AJ Bell.
As always, your decision to buy should be based on your happiness with the company’s strategy and financial strength – or inner investments and skill if it is an investment trust. The unit price of an individual proportion should not be a signal to buy or sell.
A high proportion price doesn’t equal quality
As Mould infers, a high proportion price can be a sign that a company has become successful. However, QuotedData’s Carthew believes it should be taken with a pinch of salt.
‘Prices, especially in the US, can become a bit ridiculous, especially when a company has been popular for a long time,’ he says.
‘Some see a high proportion price as a badge of honour. Berkshire Hathaway has produced an overly complicate proportion structure that penalises small investors just to continue the vanity of having a high proportion price.’
Carthew adds that proportion prices in the UK tend to be more restrained, usually in the range of about 50p to £20. ‘When proportion prices get too big, companies tend to subdivide their shares, and when they get too small, they often consolidate them,’ he says.
Other ways to buy expensive shares
Buying into a fund or investment trust allows you to own a small holding in companies with high proportion prices without forking out for a whole proportion.
Your money is pooled with thousands of other investors to buy a portfolio of tens, hundreds or already thousands of holdings.
Some proportion-dealing platforms now allow you to buy fractions of shares. They are more popular in the US, where high proportion prices are more shared. However, a few, such as Freetrade and Trading 212, have entered the UK market.
If you buy fractional shares, you should be able to sell them again on the same platform. You will also be entitled to a corresponding proportion of dividends.
Not all providers that allow trading in fractional shares let you keep up them in a complete range of tax-efficient wrappers. For example, trading 212 does not offer a self-invested personal pension.
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