What are Stock Splits?

A recent trend amongst market leading shares such as Apple (AAPL:US), and most recently Amazon (AMZN), has been to employ stock splits. With GameStop’s board (GME:US) recently approving a 4-for-1 stock split, it’s worth exploring how this impacts investors and the purpose behind splits.

What is a stock split?

When a business issues more shares to increase its stock's liquidity, the result is a stock split. The total monetary value of all existing shares stays the same and does not directly impact the company's market capitalization despite an increase to the number of shares available.

As an example, Amazon’s recent stock split in June saw the company’s shares split by 20-for-1. Let’s say one AMZN share was worth $3,000 – the stock split would divide that into 20 individual shares worth $150. You still own $3,000, just more shares.

Why do businesses opt for stock splits?

In a lot of cases, a stock split is implemented to make a share more attractive to potential investors. Normally, a high stock price is a positive thing and promising sign for the company’s prospective, but the high price of entry can make the company’s stock intimidating or inaccessible for some investors.

By splitting the stock by any multiple, it provides a more appealing access point for new buyers without impacting the value for current shareholders. This event can cause temporary price changes although these are normally not long-lasting and while they offer a lucrative opportunity to day traders, for longer term investors, the effects aren’t that important.

Are there other types of stock splits?

Reverse stock splits

There are some important distinctions when it comes to stock splits. In some instances, companies can perform a reverse stock split.

As the name suggests, this when the number of outstanding shares is reduced. If a 5-for-1 split occurred while you held 10 shares worth $5, you would be left with 2 shares worth $25.

A reverse stock split is often viewed as a bearish signal by investors, but it is typically a necessity that can yield long-term benefits. Consolidating a company’s shares will increase the price of shares; this helps struggling stocks to meet the minimum price requirements of a public exchange.

For struggling businesses, this can help keep them afloat and accessible to investors looking to capitalize on low share prices.

Stock dividend

Like a stock split, a stock dividend can dilute the intrinsic value of a single share without lowering a company’s market capitalization. However, instead of splitting a single stock, a stock dividend provides existing shareholders with additional shares.

For example, if a company issues a 4-for-1 split in the form of a stock dividend, the board will issue three new shares for every singerly held share prior to the split.

This increases the issued shares for the company, thereby diluting the price of individual shares without affecting the holding percentage of investors.

The key difference between a split and stock dividend is the former divides a stock, whilst the latter issues new ones.

Which companies have performed stock splits?

Earlier, we mentioned some high-profile companies that have split their stock recently. Even though a stock split doesn’t directly alter the per-share price for a company, there have been significant developments for these businesses in the past.

Below, we take a look at how previous stock splits have fared in the past for major companies, as well as a look at upcoming major splits:

Apple Inc. (AAPL:US)

Since becoming a publicly traded company in 1980, tech giant Apple has undergone five stock splits. The latest of these splits came in August 2020, when the firm initiated a 4-for-1 split of its shares.

As of July 2022, nearly two years since the 4-for-1 split, AAPL has increased by over 16%. Within those two years, the share price peaked at around $179.45 in December 2021, for an over 43% return in share value.

Whilst this price growth is par for the course for long-term holders of AAPL, it would have enabled new investors from the 2020 split to also benefit from the increasing profitability of the stock.

Tesla, Inc. (TSLA:US)

On the same day in August 2020 as Apple, Tesla’s board also opted for a 5-for-1 stock split. At the time the price of TSLA was around $442, and as of July 2022 is sitting around $752 – roughly a 70% price increase. It’s important to note this split was in the form of a stock dividend.

TSLA had hit over $1,084 as recent as April 2022, resulting in a 145% increase since the 2020 split. The stock has significantly dipped in the past few months, as technology shares have been under pressure as a result of supply chain issues, global inflation, and the market pressure brought on by the Ukraine war.

Despite this, Tesla is looking to undergo another stock split in 2022 to make its shares more accessible for new investors.

GameStop Corp. (GME:US)

Next we have GameStop – 2020’s leading meme stock. Whilst the split hasn’t happened yet, analysts and investors alike are watching GME closely in the lead up to its 4-for-1 split on July 22, 2022.

Like Tesla in 2020, this split will be in the form of a dividend, providing shareholders with three additional shares of GME for each one they hold.

The reception of a stock dividend amongst retail investors is feverish, as it reignites hopes for a large-scale short squeeze. As GameStop’s investor base is largely retail investors, it has resulted in a spike for GME’s price by nearly 17% since the split announcement.

Whether this increase holds long-term remains to be seen, as much the rate GME is traded is largely impacted by social media activity.

Alphabet Inc. (GOOGL:US)

The parent company of Google will be initiating a 20-for-1 stock split on July 15, 2022. This is the second split of this scale since Amazon’s 20-for-1 in June 2022 and could potentially follow a similar trend.

Whilst AMZN has dipped since the June split, it was the weeks leading up to the split that prompted a near 20% increase in the per-share price.

In the month preceding Alphabet’s stock split, the value of GOOGL has risen by over 7%. This is a significant increase, but still below Amazon’s seismic rise.

Regardless, short-term performance in the aftermath of the split will be hard to predict for Alphabet. It will provide a strong entry point for investors, bringing the stock close to the $100 mark.

Who is trading split stocks?

We’ve touched on the attention received by GameStop from retail investors, but who else is worth tracking?

Insiders don’t typically make significant trades because of stock splits, but it is worth tracking a company’s internal sentiment during these periods.

On July 11 for instance, the Chairman at Alphabet Inc, John L. Hennessy, sold 75 of GOOGL shares worth over $170,000.

This trade could be a capitalization on the pre-split price rise in GOOGL, potentially before it dips in the way as AMZN had the previous month.

Another major player in the trading of US technology conglomerates are US politicians and lawmakers. After Amazon’s stock split, several politicians made small trades around AMZN.

Read the 2iQ blog for daily insider trading reports, and follow Capitol Trades for the latest trades from Capitol Hill.

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