Companies that effect forward stock splits see average returns one year later of 25% vs about 12% for the broader market, according to Bank of America.
iStock; Rebecca Zisser/BI
It's been a big year for stock splits.
MicroStrategy became the latest company to announce a split on Thursday, with a 10-for-1 share split set to go into effect in early August as its shares hover around $1,340.
Other major companies that have implemented stock splits or announced plans to do so this year include Nvidia, Walmart, Broadcom, Chipotle, Williams-Sonoma, Cintas, Sony, Lam Research, and Texas Pacific Land.
So, why are so many firms splitting their stock? Simply put, they want to attract more investors. Many stocks that split this year are household names, like Nvidia, which has become nearly synonymous with AI. The pricier and more popular the stock, the more likely it is to split, one expert said.
"The market is up — a lot — and the most popular stocks among individual investors are among those leading the charge. The rise in the market means that more stocks are now expensive enough to justify a split while the popularity with individuals is what prompts managements to consider splits," Interactive Brokers chief strategist Steve Sosnick told Business Insider.
"Frankly, if a stock has little interest from individuals, then there is little reason for a company to consider splitting."
As to which stocks could be ripe for a split, Sosnick pointed to a handful of names trading above $500 a share as potential candidates. He highlighted companies like Autozone, MercadoLibre, Eli Lilly, KLA Corp, Netflix, Intuit, Adobe, and Meta Platforms.
According to Bank of America, stock splits can be rocket fuel for prices.
"Average returns one year later are 25% vs. around 12% for the broad market. Splits seem to be bullish across market regimes, something management teams might consider if shares look too expensive for buybacks," Bank of America said in a note in May.
Bank of America
But according to Sosnick, stock splits can also have a "buy the rumor, sell the news" impact on the share price, at least in the short term.
"Because they don't change the underlying value of the company, it is not uncommon to see a run-up in advance of the split, then a sell-off when no new demand arrives. [Chipotle] is a good recent example of this," Sosnick said.
Shares of Chipotle have dropped 12% since its shares split 50-for-1 in late June. It represented one of the largest stock splits in the history of the New York Stock Exchange.
