Some investors baulk when they see a high share price, but they shouldn’t. Photo / 123rf
OPINION
Some investors baulk when they see a high share price, but they shouldn’t.
A company’s share price tells us absolutely nothing about whether it’s expensive or cheap and if anything, it can often be a sign of a strong track record.
On the New Zealand sharemarket, Mainfreight has the highest share price at $65. Beyond that, only a handful are in double-digits.
Ebos is almost $35, Fisher & Paykel Healthcare trades at just above $20, while Infratil and Summerset are at about $10.
If Xero was still listed here, it would be around the $120 mark.
At the other end of the spectrum, there are dozens of companies with share prices under $2 and half of the top 50 are below $4.
In larger markets, it is common for shares to trade at much higher prices than we’re accustomed to, especially for businesses with a long history of success.
Of the 30 companies in the Dow Jones index in the US, the average share price is US$170.
Microsoft shares are more than US$250, McDonald’s shares trade at US$260 apiece and Johnson & Johnson is over US$150.
It’s a mistake for investors to favour companies with lower share prices, or to shy away from those that trade at higher levels.
The share price of a company only tells you whether it is good value or not if you compare it to the share of earnings, profits and dividends you get for each share.
Consider two companies: one with a share price of $1 and one at $50.
On the face of it, the first is much cheaper than the second.
However, let’s consider that the $1 share entitles the owner to 5c of annual profits, while each share in the $50 company entitles the owner to $5 of profits.
In terms of what you get for each slice of the pie, the company with the higher share price is better value here.
Despite this, it’s not uncommon for smaller, less-sophisticated investors to have an ingrained aversion to high share prices.
Many companies have conducted “share splits” over the years, in the hope of creating additional liquidity and ensuring the shares remain attractive to this group.
Google did so in 2014 and 2022, while Tesla split its shares in 2020 and in 2022.
US retail heavyweight Walmart is set to do the same, with a 3-for-1 share split scheduled for Monday.
Each existing share (as well as what it’s entitled to) will be automatically split into three. If you own 10
Walmart shares today (which are about US$170 each at the moment) you’ll have 30 shares after the split has taken place.
In theory, the share price should adjust to about US$57 at the same time, which is a third of the previous price.
Walmart investors needn’t panic, as they’ll own three times more shares than they did before, so the total value of their holding should be unchanged.
This will be the 10th share split we’ve seen from Walmart, the first taking place in 1975 and the last in 1999.
On most of those occasions, the share price performed well in the immediate aftermath.
Here in New Zealand, high-profile companies such as Port of Tauranga, Ryman Healthcare and Fisher & Paykel Healthcare have all made similar moves over the years.
Many investors seem to like share splits, but they probably shouldn’t because nothing has changed.
Just as five $20 notes aren’t worth any more than a single $100 note, your combined slice of the total profits pie isn’t any bigger either.
Ryman and Port of Tauranga would be trading around $30 today if those splits hadn’t taken place, while Fisher & Paykel Healthcare shares would be more than $100.
Google shares would be almost US$6000 each, and Tesla would be trading close to US$3000.
However, none of these would be any more expensive than they are today, in terms of the value to a potential investor.
Interestingly, Mainfreight has never shown much interest in following suit and splitting its shares, despite having the highest share price on the NZX for some years now.
I like that approach, because I think a high share price is a badge of honour that reflects decades of consistent success.
Don’t be put off by high share prices, or the illusion of good value that can come from a low price. Dig a little deeper and consider each investment on its merits.
Some of the best opportunities are the ones that might look the most expensive (on the face of it).
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.