Stock splits are becoming more common among companies like Walmart, NVIDIA, and Chipotle, with each planning to announce one this year to make their shares more affordable. However, the decision to split or not split a stock is a topic of debate among analysts.
Some experts argue that stocks that split tend to outperform the S&P 500 index in the year following the split announcement. Others suggest that a stock split is not a reliable indicator of a stock’s future value. Peter Ricchiuti from Tulane University’s Freeman School of Business points out that stocks that split usually belong to successful companies, which naturally leads to their price appreciation.
Two types of stock splits exist – forward and reverse splits. Forward splits decrease the share price and increase the number of shares outstanding, while reverse splits do the opposite. Forward splits have been predominant this year among companies like Nvidia, Broadcom, Walmart, Chipotle, and William Sonoma.
Data shows that historically, companies that have undergone stock splits have had positive one-year returns averaging 25% since the split announcement, outperforming the broader market. However, other analysts argue that stocks may only see a temporary increase in value after a split.
The main reason companies split their shares is to reduce prices and make them more accessible to a larger number of investors. Increased liquidity resulting from more trading activity can benefit both individual and institutional investors by lowering transaction costs.
In the short term, many analysts agree that stocks about to split can experience a rise. However, in the long term, various factors can affect a stock’s performance, and not all split stocks outperform the market in the long run.
Investors looking for companies likely to announce a stock split should focus on those with high stock prices. Potential candidates include companies whose stock prices are above $500, with stocks priced over $1,000 being prime contenders. Meta, the parent company of Facebook, is a notable candidate that has never split its shares despite a significant increase in stock price since its IPO in 2012.
In conclusion, the decision to buy or sell stocks that are about to split should be carefully considered based on various factors that can impact a stock’s performance in both the short and long term.
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https://www.usatoday.com/story/money/personalfinance/2024/06/24/stock-splits-should-you-buy-them/74195682007/
