Chevron's (NYSE:CVX) stock has been red-hot over the past year, surging 18.5%, which has outperformed the S&P 500's 17% return over that time frame. The stock currently trades for more than $115 per share, which has it getting closer to its split-adjusted all-time high, hit in 2014, of $135.10 per share. That's despite the fact that crude is still more than 50% off its most recent peak.
The stock's rally this year and Chevron's history of splitting when shares reach the triple digits certainly increase the odds that another split could be just around the corner. While some investors are focused on when that might happen, it's not what they should concentrate on; splits aren't going to create additional value. What will is the company's success in repositioning so it can thrive at lower oil prices.
Why Chevron split its stock in the past
Chevron has historically completed 2-for-1 stock splits when shares get around the century mark. But it hasn't completed one since 2004, even though the stock briefly hit triple digits in 2008, and spent most of 2011 through 2014 above that level before returning there over the past year.
One of the reasons Chevron chooses not to split is that splits don't matter as much anymore. Not that long ago, brokers often required investors to buy in round lots of 100 shares, which meant they needed more than $10,000 to purchase a stock that traded in the triple digits. To avoid pricing smaller investors out of their stock, companies would split it to make it more accessible. However, those round lots have gone away with the rise of online brokers, which has significantly diminished the need for companies to split their stock.
That said, many companies still do undergo stock splits. One of the main reasons is to increase trading liquidity, though for Chevron that's not an issue since more than 5 million shares trade daily. Another reason is more psychological: Many investors still equate price with value and therefore see higher-priced stocks as being more expensive than those with a lower price tag. If Chevron does split its stock again, it would likely be for this reason.
More pieces of the same pie don't mean a bigger pie
Yet even if Chevron split its stock, that move wouldn't create additional value for investors. A split is akin to breaking a $100 bill into two $50 bills. While those two fifties might be easier to spend, they still add up to $100.
What will create more value is the company's ability to increase its earnings and cash flow. That has been Chevron's focus over the past few years as it has navigated through the oil market downturn. While the company initially struggled with weaker prices, it has slashed costs and become more efficient, which has improved its cash flow per barrel as well as the returns it can earn on its capital dollars.
Chevron has reached the point where it can generate enough cash flow, after funding capital and exploration spending, to support its dividend this year at $50-per-barrel oil. By reaching that pivot point -- even if oil prices don't budge in the coming years -- the company is on track to deliver high-margin production growth, potentially fueling robust total returns for investors.
Focus not on price, but the value created
Chevron's stock has risen sharply over the past year because the company quickly rightsized its business and has adjusted to lower oil prices. Because of that higher stock price, it could choose to split any day now, as it has traditionally done when it reached the triple digits. If it did split, investors would only hold more shares of the company, not more valuable shares. However, if they continue to hold, their shares should grow in value, because of the high-return growth Chevron has coming down the pipeline. That should significantly increase earnings and cash flow even if oil remains stubbornly low.