By John Drachman
After Apple (AAPL) and Tesla (TSLA) announced their respective 4-for-1 and 5-for-1 stock splits in August their shares soared 50% or more over the following days. The eventual outcomes from both moves was eye-popping: Not only had Apple created more value for shareholders from the announcement than from its latest product introductions; but investors and fans of automobile-technology hybrids saw their dreams come true when Tesla’s market capitalization exceeded the market cap of all U.S., European, and Japanese car makers combined.
All of this upside has investors wondering whether pricey stocks like Amazon or Netflix might be next in line. “If more super expensive companies follow with splits, the stocks could rocket even higher,” financial writer Daniel Betancourt told CNN recently. “Logically, a stock split does nothing to change a company’s value. But there’s nothing logical about this market.”
Betancourt added that “companies may want to lower their price to entice younger investors using apps like Robinhood. These mostly millennial and Gen Z traders may not be able to afford many shares of a company with a high stock price.”
Amazon (AMZN), which hasn’t split its stock for 21 years, trades around $3,300 a share, while Netflix (NFLX) shares are about $500 since their last split in 2015. Alphabet’s Google (GOOGL) is also trading around $1,500. And there are other potential splits on the horizon such as Booking Holdings (BKNG), Chipotle (CMG) and AutoZone (AZO) with prices above $1,000.
“Retail investors, after a long hiatus, are gradually coming back to stocks,” said Pinebridge’s Michael Kelly. “A stock split is custom made for individual investors.”
The psychology of splitting
“Custom made” for investors is one thing. But is it a good idea to buy shares on the announcement of a stock split?
A stock split occurs when a company decides to increase its outstanding shares by distributing new shares to its shareholders in proportion to their holdings. For outside investors, a split often appears as a psychological signal that a company has been successful; that it has reached an inflection point for spreading equity ownership to a larger group of shareholders.
There’s a wrinkle in that theory: Stock splits themselves create zero economic value. Imagine a pizza comprised of 16 slices each costing $1.00 and totaling $16. By splitting the pizza 2-for-1, you’d now have 32 slices still worth $32.
Accessing big names
Splitting shares gives smaller investors a chance to buy more shares easily; prompting more trades to take place and making the market for those shares more liquid. Conversely, when share prices are too high, trading slows down and the market for those shares becomes less liquid. Also, with the arrival of fractional shares, investors have an alternative method gaining access to the priciest stocks.
If you find the lure of more affordable round-lots irresistible, Yahoo Finance offers a handy calendar of stock split events. In fact, 20 such stock splits are scheduled today, October 7. Before buying on a share split announcement, most financial professionals counsel individuals to do their homework first and analyze the company’s fundamentals. Increased demand for a company’s shares ultimately relies on its longer-term prospects in the market whether its shares split 4-for-1, 5-for-1 – or a 100-to-1.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.