Unlocking Value 

The History of Stock Splits 

A number of prominent companies, such as Chipotle (CMG), Walmart (WMT) and most recently, Nvidia (NVDA) and Lam Research (LRCX), have announced stock splits this year. Interestingly, stock splits have become out of favor relative to history. The late 1990s marked the height of stock splits, driven by broker commissions. Brokers would charge a much higher fee for stock purchases below 100 shares, ultimately enticing investors to buy in larger sizes. To keep the value of 100 shares affordable, companies engaged stock splits.¹ Today, brokers play a much different role due to electronic exchanges, and it is even possible to buy fractional shares through brokerages like Schwab and Robinhood.  

Chart 1: Stock Splits Have Fallen Out of Favor Since the Early 2000s² 

Why Stock Splits? 

Stock splits do not increase or decrease the value of the company, they merely create “more pieces of the pie” and are generally favorable for retail investors rather than institutional investors. For example, if a stock is trading at $1,000 and the company engages in a 10-1 stock split, the investor will own 10 shares at $100 per share compared to previously owning one share at $1,000. With NVDA’s most recent stock split, shareholders will soon own 10 shares for every one owned, with the stock price to begin trading at a tenth of its current value on Monday, June 10. Valuation remains consistent as metrics like “earnings per share” are also calculated according to the split.  

Lam Research (LRCX) also announced a 10-1 stock split last week. The stock will begin trading at a tenth of its value on October 3. Similar to NVDA, LRCX shareholders will soon own ten shares for every one owned, with the total value of ownership being unchanged (a $1,000 investment will still be a $1,000 investment). The company also agreed to a $10 billion stock buyback – a way to return capital to shareholders. J.P. Morgan Research notes that the buyback follows LRCX’s plan to return 75-100% of free cash flow to investors, and that the stock split will allow employees to participate in company stock ownership. One share of LRCX is over $900 and the stock split is likely to make shares more affordable for many investors.  

There are many reasons why a company might engage in a stock split, the most common being combating the appearance of a high stock price and enticing more retail investors to buy shares. $900-1,000 per share may bring “sticker shock” to a range of investors who would ultimately be more likely to buy the stock if it was at $100-200. Following Walmart’s decision for a 3-1 stock split earlier this year, its CEO stated that it was important to keep the company’s share price in a range where buying whole shares was accessible to its employees. While stock splits are not as economically significant as they were in the late 1990s, they provide value today by possibly bringing more investors to the table and increasing employee ownership.  

Stock Splits Have Historically Helped Generate Returns 

In a recent research report, Bank of America says it sees splits as a “sign of strength,” and notes that stocks which engage in splits historically perform well in the following months. They have found that stocks historically rally 25% in the 12 months following a stock split announcement, compared to the average 12% return for the broad index.³ A lower stock price may increase interest of an investor who otherwise would not have paid $1,000 per share. 

S&P 500 stocks with share prices over $500 make up about 16% of the index and $7.4 trillion in market capitalization; potential candidates for stock splits.⁴ As of May 28, 16 companies in the S&P 500 have stock prices that trade over $800 per share. Costco (COST), Broadcom (AVGO) and AutoZone (AZO) are a few companies that may follow the recent trend and engage in a future stock split given their relatively high stock prices.  

Chart 2: Ten Stocks in the S&P 500 Trade Above $1,000 a Share⁵ 

The Effectiveness of Spin-Offs 

While often discussed along with stock splits, spin-offs are a separate type of corporate action. In a spin-off, a parent company creates a new independent company by separating a part of its business. We believe spin-offs work, and that they unlock value that was otherwise locked up within a conglomerate. Spin-offs provide clearer strategic focus and operational efficiency to both the parent and newly formed companies.  

General Electric is a prime example of a successful spin-off. Once a conglomerate, the company is now broken into three distinct businesses: GE Aerospace (GE), GE Healthcare (GEHC) and GE Vernova (GEV). Each of these distinct businesses now has the opportunity to become a market leader in their respective industry.  

PWC has found that the median spin-off marginally drives excess return in the three years following the spin-off, but the top quartile outperforms the market by over 20%. It notes several factors that contribute to a successful spin-off, including strong management. Strong management executes on the desired plan and leads the newly formed company in the proper direction. Strategy, discipline, cross-functionality, timing and data are other areas that, if capitalized on, can result in a positively absorbed spin-off. GE’s stock is up 139% since the announcement of the split on November 9, 2021.  

Chart 3: When Successful, Spin-Offs Drive Immense Value⁶ 

In The End, Fundamentals Are Key 

Regardless of a stock split or spin-off, fundamentals are still the main drivers of stock performance. A stock split can attract a larger investor base, but stocks follow profits, and a stock split is not the sole cause for price appreciation. Similarly, a spin-off does not automatically mean greater efficiency – spin-offs followed by strong management and focused execution will provide shareholder value. In the end, focus on fundamentals as the main drivers of performance.  

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Sources

1. Fast Company. As of March 7, 2024.
2. Bloomberg. As of March 23, 2024.
3. Bloomberg. As of May 24, 2024.
4. Investing.com. As of May 24, 2024.
5. FactSet. As of May 28, 2024.
6. PWC. As of 2020.

Disclosures 

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.