Stocks splits are usually bullish. Here are 8 expensive stocks that could get a boost by following Nvidia's 10-for-1 move.
Will High-Priced Stocks Split Like Nvidia?
Nvidia has joined other major companies like Walmart and Chipotle in announcing a forward stock split this year, making it the eighth company to do so. While stock splits do not alter a company's market value or fundamentals, they are seen as bullish signals and can enhance stock liquidity by making shares more accessible. Bank of America notes that high stock prices can deter investment, which is a key reason companies consider stock splits. They identified eight high-priced S&P 500 stocks that could potentially follow suit, including Deckers Outdoor and NVR Inc, with current prices ranging from over $1,000 to nearly $7,500 per share.
According to Bank of America, how do stock splits historically influence market performance compared to the broad market?
According to Bank of America, stock splits have historically led to an outperformance in market performance compared to the broad market1. On average, stocks have managed 25% total returns in the 12 months after a stock split, compared to 12% for the S&P 500. This trend of outperformance has been observed in every decade, including the early 2000s when the S&P 500 struggled.
Why do companies like Nvidia and Walmart choose to perform stock splits?
Companies like Nvidia and Walmart choose to perform stock splits for a few reasons:
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Accessibility: High stock prices can make investing in the company inaccessible to employees and retail investors. By splitting the stock, the share price becomes more affordable, allowing a broader range of investors to purchase shares.
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Liquidity: Stock splits can increase liquidity by making shares more accessible. This can lead to a larger pool of potential buyers and sellers, which may improve the stock's trading activity.
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Psychological impact: Lower share prices can have a positive psychological impact on investors, as they may perceive the shares as more attractive or affordable, even though the company's overall value hasn't changed.
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Bullish signal: Historically, stock splits have been considered a bullish signal. As Bank of America notes, average returns one year after a split are around 25%, compared to 12% for the broad market. This can potentially attract more investors and boost the stock's performance.
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Facilitating buybacks: Stock splits can make it easier for companies to repurchase their own shares, which can boost earnings per share and potentially provide support for the stock price.
In summary, companies perform stock splits to make their shares more accessible and attractive to a wider range of investors, potentially boosting liquidity and signaling confidence in the company's future growth.