Why Share Splits Are Hot in a Cold Market

The market may be down, but stock splits are more in vogue than they’ve been for a long time—with 17 companies planning to chop their shares in pieces this year, almost as high as 2022’s entire split tally of 22. And why not? New research shows that splitting boosts a stock’s price.

The latest splitter in the news is Tesla, which announced in March it would make the move, but just postponed it. The likely reason, by Wall Streeters’ thinking, is that its mogul leader, Elon Musk, doesn’t want to complicate his quest for funding to buy Twitter. But most expect that Tesla will be back for its sub-dividing exercise, as it has split in the past.

While the S&P 500 is off this year by 12.4%, evidence suggests that splitting helps share values. Usually, the stocks that split carry weighty prices, so cutting a stock into two or 20 pieces makes it more affordable, especially to retail investors.

Amazon and Google-parent Alphabet have said they will split this year. Those two and Tesla are down around 20% in 2022’s crummy market. But their prices remain astronomical. Amazon’s is $2,485 per share, Alphabet’s is $2,362, and Tesla’s is $909. Their multiples show they’re on the costly side, with only Alphabet sporting a somewhat reasonable price/earnings ratio, at 21. Amazon’s P/E is 38 and Tesla’s is a heady 185.

Splitting itself doesn’t make a stock any more valuable. Alphabet, slated to split in July for 20:1, will carry the same market cap as before. Let’s say the split happened today: One Alphabet share becomes 20 shares, each priced at slightly over $118.

Nevertheless, splitting is a sign of financial health. Psychologically, according to a Bank of America study, splits juice stocks’ appeal considerably. By BofA’s reckoning, after their announcements since 1980, S&P 500 stocks that split have beaten the index over three, six, and 12 months. The split stocks outperformed the S&P 500 by 16.3 percentage points over the next 12 months.

“Underlying strength in the company is a primary driver of elevated prices,” the study states. “Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.”

The heyday for splits was in the late 1990s, when dot-coms were spiraling in price. In 1999, the split count topped 100. Alas, some of these high-fliers crashed and burned.

“By itself, a stock split should neither create nor destroy any value,” says Christopher Harvey, Wells Fargo’s head of equity strategy, in an investor note. “The stocks that split typically have positive price momentum, generally good things are happening at the company, and fundamentals are improving.”

Viewing the list of 2022 stock splits, that certainly is the case.