Why do ASX companies undertake share consolidations? Here are the 2 key reasons

Nick Sundich Nick Sundich, August 2, 2023

Some microcap ASX stocks (particularly companies below 1c) will undertake share consolidations for several reasons.

 

SIGN UP FOR THE STOCKS DOWN UNDER NEWSLETTER NOW!

 

1. Share consolidations lead to an increased share price

First and foremost, consolidating shares can increase the stock’s market price, making it more appealing to certain investors and possibly leading to increased demand. And this is the key reason that many companies will state when outlining plans for a share consolidation.

This move often leads to an increase in the stock’s market price because the intrinsic value of the company remains the same while the total number of shares decreases. As a result, each share represents a larger portion of the company’s assets and earnings.

This could potentially make the stock more appealing to certain investors. Many institutional investors often avoid lower-priced stocks due to perceived volatility, so a higher share price can attract this class of investors.

However, it’s essential to note that share consolidation does not inherently change the total market capitalisation or financial performance of the company. Therefore, a company still may not be appealing to all investors even after a share consolidation.

2. They can also help meet stock exchange requirements

Second, it can help a company meet stock exchange listing requirements.

Many stock exchanges have minimum share price requirements for listed companies and/or for indices. The NASDAQ for instance has a minimum price of $4 for a newly listed company and $3 for all others.

If a company’s stock price falls below such a minimum threshold, it risks being delisted. In such scenarios, a share consolidation can be an effective strategy to increase the share price and maintain compliance with exchange listing requirements.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips on the top Stocks in ASX

What about the opposite move – a stock split?

Sometimes companies do the opposite – share splits. This is typically achieved by dividing each existing share into multiple ones, thereby reducing the individual share price. For instance, in a 2-for-1 split, every share owned by an investor is divided into two, effectively halving the price per share.

The overall value of the investment remains the same, as the increase in share number balances out the reduction in share price. Companies often resort to splits to make their shares more affordable (only on the surface) to retail investors and increase liquidity.

Share splits increase the number of shares available, lowering the individual share price while maintaining the overall market capitalisation. Although this rare in Australia, high-profile companies on Wall Street have undertaken them historically and recently. Apple carried out a 4-for-1 split in August 2020 (the fourth in its history), while Tesla implemented a 5-for-1 split in the same month, both with the aim to make their shares more accessible to individual investors.

So, you can see they work similarly to share consolidations and have similar objectives (to influence the level of investor interest) but in different directions.

 

Stocks Down Under Concierge is here to help you pick winning stocks!

The team at Stocks Down Under have been in the markets since the mid-90s and we have gone through many ups and downs. We have written about every sector!

Our Concierge BUY and SELL service picks the best stocks on ASX. We won’t just tell you what to buy – we give you a buy range, price target and stop loss level in order to maximise total returns. And we will only recommend very high conviction stocks where substantial due diligence has been conducted.

Our performance is well ahead of the ASX200 and All Ords.

You can try out Concierge … for FREE.

 

GET A FREE TRIAL TO CONCIERGE TODAY

 

There’s no credit card needed – the trial expires automatically.

 

 

Recent Posts

FY24 guidance

5 stocks that issued or upgraded their FY24 guidance in recent weeks!

We’re nearly at that time of year when companies upgrade or downgrade their FY24 guidance. It is called ‘confession season’.…

Temple and Webster (ASX:TPW): Here’s why there’s still more growth to come from this ecommerce furniture outlet

Temple and Webster (ASX:TPW) was one of several homewares and furniture companies to benefit from the pandemic as locked-down consumers…

tigers realm coal

Tigers Realm Coal (ASX:TIG): Its making an awkward exit from Siberian coking coal, but what’s next?

Tigers Realm Coal (ASX:TIG) has been one of the few ASX stocks (if not the only ASX stock) with direct…