Stock-Split Watch: Is Constellation Software Next?

Constellation Software (TSX:CSU) shares cost nearly $4,000. Will the company do a stock split?

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Constellation Software (TSX:CSU) is one of Canada’s most expensive stocks — not necessarily in the valuation sense, but in terms of the raw price. Although CSU stock is fairly expensive going by valuation multiples (i.e., the price-to-earnings ratio), its real “steep price tag” is simply the number of dollars it costs to buy a share. Weighing in at $3,684, CSU is one of the most expensive stocks in the market that isn’t named Berkshire Hathaway.

Now, as long-term investors, we might not care much about stock splits. After all, what’s $4,000 when you’re contemplating holding a stock as a major part of your net worth for many decades? If you don’t have the cash lying around, you can always buy fractional shares anyway.

Nevertheless, stock splits can have some effect on how a stock trades. Not everybody knows about fractional shares or uses a broker that supports them. There is somewhat of a trend toward companies doing stock splits, with Alphabet, Tesla, and Shopify being just three names to have recently done splits. These examples provide mixed evidence as to the value of stock splits: Alphabet and Shopify have risen considerably since their splits, while Tesla has fallen in price. It’s not clear, based on these examples, that stock splits increase long-term shareholder wealth, but there is a chance that a split can trigger some short-term buying in a particular name.

So, CSU choosing to do a stock split could maybe have a short-term impact on its stock price. If you are interested in trading on such a factor, read on, because I will spend the rest of this article attempting to determine whether CSU will split its shares in 2024.

Why CSU stock is a natural candidate for a stock split

CSU stock is a natural candidate for a stock split because of its steep price tag. When a stock rises to several thousand dollars, it reaches a point where some investors can’t afford it. Truthfully, pretty much anybody can buy any stock thanks to the rise of fractional shares, but not everybody wants to switch to brokers that support such shares. Some don’t even know they exist! Consequentially, it’s likely that bankers see a CSU stock split as a lucrative opportunity. If any of them have Mark Leonard’s ear, they’re likely whispering into it that he should do a stock split.

Why it might not do one

The reason why Constellation Software might not do a stock split is because such splits are products of short-term thinking. There is little evidence that they increase long-term shareholder wealth. But by making shares available to more people, they might increase volatility and active trading. This isn’t a positive for long-term-oriented but nervous investors. The volatility that comes with lower share prices might cause them to panic.

This is all problematic for Constellation Software’s chief executive officer (CEO), Mark Leonard, because he has to preserve his reputation as a long-term investor. He is well known for keeping companies intact after buying them. This kind of “benevolent treatment” of acquired companies gives him better access to deals than some CEOs have. It’s largely this kind of thing that Warren Buffett built his reputation on. If Leonard pursues a stock split, it might signal to investors that he is shifting to a more short-term mindset. That would hurt his ability to do deals.

CSU stock split: Foolish takeaway

On balance, I don’t find it likely that Constellation Software will do a stock split soon. Based on Mark Leonard’s mindset, it’s unlikely that he sees such a move as necessary. Bankers may be trying to convince him to do one, but he doesn’t seem like the type who would listen to that kind of talk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has positions in Alphabet and Berkshire Hathaway. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Alphabet, Berkshire Hathaway, Constellation Software, and Tesla. The Motley Fool has a disclosure policy.

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