Although the rise of artificial intelligence has hogged most of the glory, it's not the only trend that's been piquing investors' interests in recent years. Euphoria concerning stock splits in brand-name businesses is another big-time catalyst for equities on Wall Street.
While a handful of prominent stock splits have already taken shape this year, including forward splits for online travel site Booking Holdings and e-commerce-based used-vehicle retailer Carvana, it's the recently announced reverse split from 224-year-old specialty chemicals company DuPont (DD +2.40%) that's a true eye-opener and head-scratcher.
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Not all stock splits are created equally
A stock split is an event that allows a company (even a private one) to cosmetically adjust its share price and outstanding share count by the same factor. These changes are cosmetic in the sense that they don't alter a company's market cap or operating performance.
Most investors gravitate to companies announcing and completing forward splits. This is the type of split that makes shares more nominally affordable for retail investors who can't buy fractional shares through their broker. Typically, if a company's share price is high enough to become burdensome for everyday investors, its management team must be doing something right.
Additionally, Bank of America Global Research found that, since 1980, companies conducting forward stock splits have more than doubled the returns of the benchmark S&P 500 in the 12 months following their split announcement.
Comparatively, reverse stock splits often have a poor track record. Companies completing reverse splits typically have struggling/failing operating models and are attempting to avoid delisting from a major stock exchange.
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DuPont doesn't fit the mold of a typical reverse split
Last week, on May 26, DuPont's board announced a 1-for-3 reverse stock split that's set to go into effect after the close of trading on June 23. Based on its closing price on May 29, DuPont's reverse split will triple its share price from $48.42 to $145.26 and slash its outstanding shares from around 405 million to approximately 135 million.
DuPont isn't struggling from an operating standpoint. Its latest quarter featured 2% organic sales growth, $232 million in cash provided by its continuous operations, and the announcement of a $275 million share repurchase program. And with a $48.42 share price, it's in absolutely no danger of being delisted from the New York Stock Exchange.
So, why is DuPont completing a reverse split? Although the company's press release didn't offer an answer, investor psychology is likely the driving force.
NYSE: DD
Key Data Points
With a majority of brokers enabling customers to buy fractional shares, more public companies are trading over $100 per share than ever before. This includes specialty chemicals titan Air Products and Chemicals, which is at nearly $279 per share, as of this writing. Lifting DuPont's share price well above $100 will nominally align its shares with many of its peers.
A reverse split also allows DuPont to dazzle Wall Street and investors with a nominally beefier per-share profit. Even though a reverse split doesn't affect a company's underlying operating performance, an adjusted full-year profit of $7.02 to $7.16 per share sounds more enticing than $2.35 to $2.40 per share.
DuPont doesn't fit the mold of a typical reverse split, but it's bound to garner attention.
