Suddenly, stock splits are fashionable. Amazon (AMZN -1.35%) split its stock in early June, and four more high-profile stocks have splits in the works. After a quiet decade for stock splits between 2010 and 2020, why are these top stocks splitting now?
The short answer is that times have changed. Simply put, the benefits of stock splits are more relevant today than they've been over the past 10 to 12 years.
Splits can increase investor demand
When a company splits its stock, it generates buzz and lowers the share price. Both outcomes can increase demand for the stock. Financial headlines draw attention, and a lower share price appeals to a wider audience of investors.
Take Amazon as an example. Prior to its 20-to-1 split in early June, Amazon stock was trading at around $2,000 per share. Post-split, Amazon's share price is closer to $100. There are many individual investors whose budgets won't allow them to buy $2,000 stocks. But $100 per share? That's a more welcoming price point.
Bear market blues
During the historic bull market that ran from 2009 to 2020, Amazon and other high-profile stocks didn't need to split. Demand remained high, even as stock prices stretched up into four digits.
Today's market sentiment is decidedly more uncertain. Investors are worried about inflation and rising interest rates -- and specifically, how those headwinds will affect growth-oriented technology companies. Those concerns are at the heart of the 2022 tech sell-off, which gained momentum at the start of this year.
Following a decade of light split activity, this tentative market climate naturally encourages more stock splits. In a down market, corporate leaders want to spur investor demand. And after a decade of solid growth, many stock prices are high enough to support splitting as a strategy to accomplish that.
2022's high-profile stock splits
The table below shows five upcoming stock splits that are generating headlines in 2022.
|
Company Name and Ticker |
Stock-Split Ratio |
Split Date |
|---|---|---|
|
Alphabet (GOOG -1.80%) |
20-for-1 |
July 15, 2022 |
|
Amazon |
20-for-1 |
June 3, 2022 |
|
Tesla (TSLA -5.59%) |
3-for-1 |
Pending. Shareholders will vote on proposed split on August 4, 2022. |
|
Shopify (SHOP -2.04%) |
10-for-1 |
June 28, 2022 |
|
GameStop (GME -6.59%) |
To be determined |
Pending. Shareholders approved the proposal to raise authorized shares of GameStop's Class A common stock from 300 million to 1 billion. |
Table data source: Financial filings.
After trading closes on the split date, the company distributes additional shares to eligible shareholders. Usually on the next business day, shares begin trading at the lower, split-adjusted price.
More shares, same value
A stock split doesn't fundamentally change a company's value -- it only redistributes that value into more, but smaller, units. A 2-for-1 split, for example, doubles the number of shares outstanding and halves the value of each share.
For a more visual example, picture a melon that's quartered. To split that melon, you could slice each quarter into two or three smaller sections. You'll have more pieces, but still only one melon in total.
Changing times
Increased stock-split activity in 2022 is a function of changing times. The market climate today is different than it was in the 2010s. As such, leadership teams are more motivated to make moves that may increase investor demand.
You can benefit from the trend, too -- without trying to predict short-term stock movements surrounding split announcements and implementations. The easier approach is to evaluate whether a stock becomes investable once it's trading at a lower price.
If yes, add it to your portfolio after the stock splits. And then wait for your gains to materialize over time.
