Tesla and GameStop are splitting their stocks.
They join a group of companies bringing a forgotten trend back from the dead.
The revival may have begun in the summer of 2020 when Apple announced its first split since 2014. Since then, several high-profile companies, including Nvidia, Amazon, Alphabet (Google) and Tesla, have joined in the stock split fun. In the decade leading up to now, stock splits have become a rare corporate event. Management teams seemed to take pride in the rise of their stock price beyond reasonably affordable levels, as it was seen as a sign of exclusivity.
That may be changing as the recent resurgence has high-priced tech leading the charge. Unlike in the past, the traditional reasons for splitting a stock may not be the primary drivers of recent moves. The individual investor may carry more weight than you think.
Why split a stock?
A stock split can be a powerful signal of confidence. It’s thought that executives are more willing to split their stock when they expect shares to continue to rise.
Plus, when stocks trade in a so-called comfortable range, everyday investors can more easily afford a piece of the company. That drives more interest in the shares — and more interest means more people trading the stock.
The advent of fractional shares, coupled with the popularity of ETFs (exchange-traded funds), have made it easy for investors to gain exposure to some of the high-priced stocks without paying current prices. That has made stock splits less necessary. However, not all brokers offer fractional shares.
Recent Returns Losing Their Shine
Part of the recent excitement about stock splits has been the initial stock reaction. Companies such as GameStop, Tesla and Alphabet saw their stocks jump on the day the news was announced. Looking back at history, stocks that split have handily outperformed the S&P 500 a year following the split. Going back to 1990, the average one-year outperformance was 15% versus the S&P 500.
But recently, that outperformance has been less impressive. The 15% upside was reduced to 7% if you look at data since 2010. Additionally, the 2 For 1 Index®, an equally weighted index of 25-30 stocks that have recently announced a split, shows that the S&P 500 total return index has actually narrowly beaten the portfolio of splitters since 2012.
If investors have alternative ways to buy high-priced stocks, and the performance of splits has been lackluster in more recent years, why have stock splits returned?
It’s easy to point out that technology companies with flashy price tags account for one third of the stock splits announced since the start of 2020. Sure, there could be genuine interest in bringing their stock prices back down to earth to make their shares more affordable to the everyday investor. But there has been a shift in the market for many of these stocks. Many of them need retail investors to keep their stocks moving up and to the right on the chart.
In the case of GameStop, its stock has thrived on the rise of the retail investor. Yet its stock price fell nearly 70% between November 2021 and March 14, 2022. A split may be just the boost retail investors need to be reminded that the meme stock trend is not dead.
For Tesla, the announcement of a new stock split comes less than two years after its last split. If anyone understands the power of the retail investor, it’s Elon Musk. The CEO of Tesla knows there is a significant following by this strong base, and a stock split can help entice them to buy the stock. It could also help reduce the weighted influence of institutional (hedge fund type) ownership. Retail investors are more likely to let Elon do his thing. And they are less likely to bet against him.
In the case of Amazon, its stock could use a little rattling, as it has traded sideways for most of the past two years. With a new CEO on board, a split can help reset the stage for his strategy. Its split would bring Amazon shares back under $200 and in-line with the average stock price for an S&P 500 stock. That could certainly entice consumers that use the service on the regular to buy into the stock.
The Bottom Line
While we’re still far off from the go-go stock split days of the ‘90s, we’re seeing the trend show some signs of life. It might just be that the cachet of having a high stock price has lost its luster. However, there seems to be a realization that high-flying stocks have become more dependent on individual investors than in the past. Making share prices more affordable increases a company’s access to this powerful tool. It’s a tool that can drive momentum in a stock and result in strong support of management’s operational strategy. Perhaps the stock split trend is here to stay.
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Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.