Stock splits are popular again. 5 companies that could split their shares next
Stock splits are back in vogue and the market is quickly rewarding companies that split their shares. ParentGoogle
are among the latest companies to seek shareholder approval for splits. Each of them enjoyed a post-announcement rally.
There is no fundamental impact of a stock split beyond an increase in the number of shares, which makes subsequent rallies confusing, especially for those who believe in a rational market.
Ultimately, market love is more a symptom of the stocks’ success than a result of their shared plans. Companies that do spin-offs tend to do so because their shares have already risen a lot lately. And stocks with positive momentum have a habit of continuing to rise.
“By itself, a stock split should neither create nor destroy value,” said Christopher Harvey, head of equity strategy at Wells Fargo. “Stocks that split generally have positive price momentum, generally good things are happening in the company and the fundamentals are improving. That’s what the market is focused on, and a stock split is right something you do when it happens.
In other words, it’s more about correlation than causation. But the figures speak for themselves: since 1980,
stocks that announced splits beat the index by 16 percentage points, on average, over the next 12 months, according to BofA Securities researchers.
Splits in recent years have come from mega-cap tech companies, including
(NVDA) and Tesla (TSLA) – all with high-flying stocks – but also less notable companies including
(MKC). There have been about 20 spin-offs per year by US issuers over the past decade, according to Dow Jones Market Data.
“By itself, a stock split should neither create nor destroy value.”
The real peak of the split came during the tech bubble of the late 1990s. From 1997 to 2000, an average of 65 US companies split their stocks each year when markets melted. The frequency of splits increased again in the years leading up to the global financial crisis, at the end of another long market rally.
Today, the middle stock of the S&P 500 is priced around $118. However, several companies are trading well above this level and could be candidates for spin-offs. The most expensive stocks in the United States are the Class A shares of
(BRK.A), which have never been divided. These recently cost $517,000 and only trade hands a few thousand times a day, on average. Warren Buffett may never split these stocks, but investors have another option: Berkshire Class B shares are 1/1,500th of an A, or a recent $350.
The house builder
(NVR) has the next highest stock price at $4,380 recently, followed by Amazon.com (AMZN) and Alphabet (GOOGL). Alphabet management said Feb. 1 that it would seek shareholder approval for a 20-to-1 split this summer, starting at a recent $2,811. Its shares gained 7.5% the next day, also boosted by stronger-than-expected fourth-quarter results. Amazon announced its own 20-to-1 split intentions about a month later, alongside a $10 billion share buyback clearance. The stock, recently at $3,281, added more than 5% the next day.
“The Board of Directors anticipates that the increase in the number of shares outstanding resulting from the stock split will reset the market price of common stock to a range that would give our employees more flexibility in how they manage their equity in Amazon and make common stock more accessible for anyone who wants to invest in Amazon,” the company said in a filing.
During the last week of March, Tesla said it would pursue its second stock split in as many years, at an undisclosed ratio. Not to be outdone, GameStop (GME) said on March 31 that it would seek shareholder approval to do the same. Shares of the video game retailer, however, did not see a lasting rise. They opened more than 13% higher the morning after the announcement, to close less than 1%. Earlier that week, the stock soared 25% in one day.
The other most expensive stocks in the S&P 500 are:
(BKNG), at around $2,300;
(AZO), at around $2,040;
Chipotle Mexican Grill
(CMG), at around $1,600; and
(BAT), about $1,350.
Typical arguments in favor of a split are aimed at making low-priced stocks more accessible to individual investors or employees who might find it difficult to buy high-priced stocks.
For example, consider a $2 billion company with one million shares outstanding and a stock price of $2,000. After completing a 10-to-1 split, the company will have 10 million shares, each trading for $200, and an unchanged market value of $2 billion. Each shareholder would only get nine new shares for each he held before the split. An investor who was only willing to invest $200 in the company can now buy a full share, and more in increments of $200, not $2,000.
|Company / Symbol||Recent Price||Market value (bil)|
|NVR / NVR||$4,380.42||$15|
|Amazon.co.uk / AMZN **||$3,281.10||$1,670|
|Alphabet / GOOGL **||$2,811.82||$1,862|
|Reserve assets / BKNG||$2,298.00||$94|
|Auto Zone / AZO||$2,041.39||$41|
|Chipotle Mexican Grill / CMG||$1,605.23||$45|
|Mettler-Toledo International / MTD||$1,348.16||$31|
|Tesla / TSLA **||$1,091.26||$1,128|
* BRK-B shares trade for 1/1,500 A shares; ** Announced stock splits
Companies want to have a diverse shareholder base made up of institutional investors and individuals, whose influence in markets and individual stocks has grown in recent years.
But this logic is much less relevant in today’s market than it was a few years ago. Most brokerages allow investors to hold fractions or “slices” of individual stocks. Fidelity allows customers to buy slices of thousands of US stocks and exchange-traded funds, starting at $1.
users can buy as little as one millionth of a share. An investor could acquire $200 of a $2,000 stock, or $1, or $10, or $54.31, for that matter, with little effort.
A Fidelity spokeswoman said 2.3 million accounts used fractional shares last year.
Additionally, many investors are exposed to the market through index ETFs, which already allow them to hold baskets of stocks at a lower price than the combined prices of index securities.
Once upon a time, stock splits could be an inconvenience for investors who paid commissions per share rather than per trade. This disadvantage has largely disappeared in the era of commission-free trading, which is now common in all brokerage firms.
Options change hands in lots of 100, so contracts on a high-priced stock can be expensive. The past two years have seen an explosion in retail investor involvement in the options markets, so the effect there may be greater. But that’s more of a factor for the GameStops of the world than for the Amazons.
“This is where manuals and order books diverge, where reality diverges from theory.”
More digestible pricing for Amazon or Alphabet could make them more likely candidates to join a price-weighted index like the Dow Jones Industrial Average. And while it’s still speculation at this point, Apple secured admission to the Dow Jones in 2015, just a year after completing a 7-for-1 stock split. completed five spin-offs since going public in 1980 for $22 a share. On an allocation-adjusted basis, its IPO price was 10 cents.
So why split a stock? It’s probably more about optics and signaling confidence than anything more technical. Management indicates that it expects the stock to continue to rise after the split, and the market likes to see bullish insiders.
A stock price split after 20 to 1 that moves 50 cents in a day, rather than $10, could signal more stability to investors. The split announcements are also attracting sell-side media coverage and analyst research. And the divided cycle turns and turns.
So, in the very short term, you will often see a stock appear on a split listing. But this exceeds expected performance, not because a spin-off adds value to a company per se.
According to Jack Ablin, chief investment officer at Cresset Capital, which manages approximately $22 billion in assets: “This is where the textbooks and the order books diverge, where reality diverges from theory.”
Write to Nicholas Jasinski at firstname.lastname@example.org