Companies perform stock splits for a variety of reasons, from a desire to increase the liquidity of their shares to an interest in making them more accessible to a wider range of investors. Such events involve giving all current shareholders more shares, but without changing the total value of their holdings or their relative stakes in the company. The result is to reduce the value of each individual share.
In recent years, some of the world's biggest companies have undertaken these financial maneuvers. Technology giant Amazon and electric vehicle leader Tesla both split their stocks in 2022, and most recently, consumer goods giant Walmart announced a 3-for-1 split that will happen later this month. Investors often are on the lookout for potential splitters because, generally, these companies have done well from both an earnings and a share performance perspective, which can indicate that they have what it takes to excel in the future, too.
Which company could be next? Shares of Vertex Pharmaceuticals (VRTX -0.06%) have soared by 78% over the past two years to more than $400, and key catalysts on the horizon could push them even higher.
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Vertex's new product
Vertex has a highly profitable monopoly on effective cystic fibrosis treatments, but its shares have soared over the past couple of years thanks to the company's work to expand its portfolio beyond that indication. The biotech and partner CRISPR Therapeutics developed Casgevy, a gene-editing therapy for the blood disorders sickle cell anemia and beta-thalassemia, and it recently earned regulatory approval. Investors took notice.
On top of this, Vertex aims to file for regulatory approval of two more pipeline candidates -- one, a product that could ensure its long-term leadership in the cystic fibrosis market, and the other, a medication for acute pain that (importantly) is not an opioid. If they're approved, both could add billions of dollars annually to Vertex's top line. So even after the stock's fantastic performance, the good times may keep on rolling.
Meanwhile, Vertex's current cystic fibrosis portfolio continues to bring in billions of dollars in earnings year after year. In 2023, product revenue climbed 11% to more than $9.8 billion, and net income reached $3.6 billion.
Vertex's stock reached record levels in recent months thanks to all of this good news and the potential positive news to come. This is great for current shareholders, but the price may put the stock out of reach for some investors who haven't yet gotten in on this story. After all, certain brokerages don't offer fractional shares -- and some investors may not have the budget to buy Vertex shares at today's price.
Vertex's last stock split
So, what's the likelihood of Vertex splitting its stock and solving this problem? Well, Vertex has split its stock before, but that was quite some time ago, when the company was a lot different from the Vertex of today. Back in August 2000, Vertex commercialized an HIV protease inhibitor, and the company's pipeline spanned a variety of disease areas that aren't its focus today. When Vertex announced that stock split, it aimed to increase the liquidity of its stock and broaden the shareholder base -- and it succeeded in the near term and over time.
VRTX Shares Outstanding data by YCharts.
Today, Vertex's situation has changed quite a bit, with the company reporting billion-dollar earnings and the possibility of additional blockbuster products on the horizon. While its share price may put it out of reach for some investors, its valuation still remains reasonable. The stock trades for only 25 times forward earnings estimates, and this doesn't take into account earnings potential a few years down the road.
Does Vertex need a stock split?
Vertex probably doesn't need to split its stock as much as it needed to more than 20 years ago, and with the focus on potential new products ahead, the company may not make this sort of move a priority. Finally, stock splits themselves generally don't boost stock performance -- so such an action wouldn't drive additional gains for investors.
That said, a stock split could indeed benefit Vertex and its shareholders by making its shares an easier buy for a wider range of investors, and this means, over time, it might be a valuable move for the biotech giant.
What does all of this mean for you as an investor? Vertex may not be the next to announce a split, but for most of us, that's just fine.
A stock-split announcement may put an extra spotlight on a top-notch player such as Vertex, and a split may offer a company some liquidity benefits over the long haul. But these events won't result in instant share price gains, and they aren't the only way to find good investments. So, if you've already spotted a top-notch pick, it's best to buy shares when their valuation looks reasonable and the future looks bright -- whether that company has announced a stock split or not.
