Why Intel Shouldn’t Do a Stock Split Yet

During Intel‘s (NASDAQ: INTC) most recent stockholder meeting, one investor asked management the following question :

What about doing a stock split to make shareholders like myself be more in tune with Intel?

Intel’s response, predictably, boiled down to, “No comment.”

Image source: Intel.

It might seem that this question-and-answer pair isn’t that useful to current and prospective investors, since it’s not entirely clear from the question what the investor meant by making Intel more “in tune” with fellow shareholders. But it does raise the issue of whether Intel should do a stock split, and my answer to that is no.

Intel’s stock is accessible

One reason that companies split their stocks is that it makes the stock seem more accessible to a broader set of shareholders. For example, if an investor puts away $1,000 per month into their retirement account and they want to use that money to buy shares of a company that they really like, it’d be much easier for them to make regular purchases of that company’s stock if each share cost $50 instead of, say, $5,000 (in that case, they’d have to either buy a fifth of a share each month — something that can be hard to do — or wait five months to buy a single share).

Now, to be clear, whether a stock is worth $50 per share or $5,000 per share, a $1,000 investment is still a $1,000 investment. However, for many individual investors, especially those starting out with relatively little investment capital, a stock that’s worth $50 per share may simply seem more accessible than a stock that’s worth $5,000.

In the case of Intel, I think at $55.05 (where the stock last traded as of this writing), the stock is still accessible to many individual investors. An investor with even reasonably modest capital should be able to buy a solid amount of Intel stock at the current share price.

When should Intel stock split?

As far as I’m concerned, a company should seriously start thinking about splitting its stock when it becomes worth more than, say, $100 per share. At that point, it’s a lot more difficult for many individual investors to buy a psychologically pleasing number of shares (e.g., 50 shares or 100 shares). That perceived inaccessibility could turn potential individual investors off to the stock.

And, of course, it’s generally not a good idea for a company to have potential investors put off from buying its stock — after all, the more demand there is for a company’s shares, the more the company could be worth.

For some perspective, Intel stock currently trades at just under 16 times trailing-12-month earnings. For Intel stock to be worth $100 at that multiple, the company would need to earn $6.25 per share.

That’s probably not going to happen anytime soon. Current analyst estimates call for Intel to rake in $3.83 in earnings per share in 2019 and then $4.54 per share by 2020. If Intel winds up hitting those estimates (though there are, of course, risks that could prevent Intel from getting there), then I could see the stock hitting roughly $72 per share by the 2020 time frame.

At that point, if Intel management can see a path to around $6.25 in earnings per share, then it might want to start thinking about a stock split. But that seems like it’d be many years off, so for now I don’t think Intel needs to deal with splitting its stock.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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