Canopy approves resolution authorizing board to split shares
Canopy Growth (NYSE: CGC) (TSX: WEED) shareholders have approved a resolution to authorize the Board of Directors to split the shares in a ratio between 2:1 and 3:1 at its discretion. If the Board decides to split the stock, shareholders will be notified by way of a press release (read full news release here).
Assuming WEED proceeds with a 3:1 split, shareholders on the record date end up with three shares for every one share they owned previously and the stock price will fall to one-third of the prevailing price on the stock market. This means the value of an investor’s holding will remain unchanged. The number of shares owned will triple and the market price will fall to one-third.
As Canopy Growth went public as Tweed Marijuana by a Reverse Takeover (RTO), it was not really possible to purchase stock at $.05 per share shown on the chart for early 2014. But later in the 2014 – 2016 there were many opportunities to buy the stock in the $2.00 per share range. In less than five years, the stock has risen to around $34 per share for a roughly 17-fold increase in value and at its all-time high of just under $49 per share, investors had in excess of a 24-fold return. In theory a price of approximately $11 per share assuming a 3:1 split will allow or attract some additional investors to buy the stock. We conclude the share split is potentially advantageous for shareholders with no potential for a negative outcome.
Although a stock split does not change the valuation of a company, it returns the company’s stock price to a more “affordable” level for individual investors. To the extent that more investors are able to or want to buy the stock at the lower price, liquidity will be improved. A well-known company shows what can happen if you don’t split your shares from time to time. That stock is Berkshire Hathaway (NYSE: BRK.A), the flagship of internationally renowned investor Warren Buffett. BKA closed last week’s trading at $304,671 per share! Although we can all dream that Canopy will advance in price another 8,960 times to match BRK, none of us want a share price in excess of $300,000.