Stock splits are back. The same goes for the debate on their importance
Stock splits are back in fashion among large U.S. corporations, reigniting a debate over whether the practice that has been out of favor for years is worth it.
Last week, Nvidia Corp. became the eighth company in the S&P 500 Index to announce a spin-off in the past year, join big names like Apple Inc. and Tesla Inc. That’s the most over a comparable period in six years, according to data compiled by Bloomberg.
The soaring divisions come amid a rally that has pushed the stock prices of nearly 600 stocks on the Russell 3000 Index above $ 100. Yet that did little to settle the age-old argument among investors about whether such stock price engineering affects performance. In fact, recent developments such as the boom in retailing and fractional ownership have only made matters worse.
“Arithmetically, there is no merit in making stock splits work,” said Mark Lehmann, president and CEO of JMP Securities LLC. “But there is an optical hesitation for certain stocks at certain prices and there is a segment of the investing public where that will never change.”
The main motivation cited by companies making splits is simple: to make each stock cheaper to buy. Nvidia, whose share price has more than quadrupled since the start of 2019 to nearly $ 650, said in a statement announcing its 4-for-1 stock split plan according to which its objective was to “make share ownership more accessible to investors and employees”. A representative for the chipmaker declined to comment further.
Once a reliable feature of the exuberance of the bull market, the practice had until recently fallen out of favor. In 2006 and 2007, as stocks set new records, there were 47 divisions in the S&P 500. Three companies – Nvidia, Paccar Inc. and Cummins Inc. – even split twice. In 2019, there were only two.
For Julian Emanuel, chief equities and derivatives strategist at BTIG, it is more difficult to argue for a stock split these days due to the rise of commission-free trading and brokers offering fractions. actions. These developments “have largely rendered the dollar value of a company’s share price unnecessary,” he said in an interview.
Brokers like Robinhood now allow investors to buy a share of a stock for as little as $ 1 rather than shell out more than $ 2,300, say, for a single share of parent company Google Alphabet Inc.
A look at the data confirms the case against splits offering long-term benefits for stock performance. Shares of companies that split have on average outperformed the S&P 500 in four of the last five years of the year the split was announced, according to Bloomberg data. In the calendar year following the move, however, those same stocks underperformed four of the five years.
The recent eruption of stock splits sparked speculation that other big tech companies like Amazon.com Inc., which have four-digit prices, may be next. Amazon split its stock three times in 1998 and 1999 and hasn’t done so since. Shares of the e-commerce giant are trading around $ 3,200 and have gained more than 5,000% since its last split.
Regardless of what historical performance shows, the surge in retailing over the past year may change how companies calculate when it comes to valuing splits.
According to Larry Tabb, director of market structure research at Bloomberg Intelligence, US retail investors now rank second in equity trading only after market makers and high-frequency independent traders. The retail segment is now bigger than quantitative investors, hedge funds and traditional long-term participants, Tabb said.
“A lot of investing is motivated by psychology,” said Kevin Walkush, portfolio manager at Jensen Investment Management. “Now, rather than a retail investor facing the challenge of buying a fraction of a stock, a stock split means they can buy it outright. It just opens up the market more to retail investors. “
– With the help of Tom Contiliano