Even though there seems to be a rush of high-profile stock split announcements from companies like Broadcom Inc., Nvidia Corp., and Chipotle Mexican Grill Inc., management teams are usually taking their time before going to Splitsville.
Birinyi Associates data shows that as of Wednesday night, 10 S&P 500 SPX companies had announced stock splits for the year. If the same number of splits are announced in the second half of the year, the index is on track for its busiest year of splits in almost 20 years. But executives are still much more patient with splits than they were in the 1990s and early 2000s.
Last year, there was only one split among S&P 500 SPX components. For most of the last ten years, the number of splits within the index has been in the single digits each year. Birinyi Associates data from 1990 to 1997 shows that the rate of splits was highest during the dot-com boom, reaching a high of 93 in 1997. This year there has been a slight rise.
Qualcomm Inc. QCOM, -1.14%, was one of the best examples of a stock split during that tech boom. The company did two splits in 1999: a 2-for-1 split at $212 per share in May and a 4-for-1 split at $647 per share in December.
Today, Nvidia’s NVDA, +1.75% stock split made it worth about $120 instead of about $1,200. Trading started earlier this week after taking into account the split. But many business leaders in the 1950s and 1960s would have thought that even that new price was too high.
Sam Stovall, Chief Investment Strategist at CFRA, said that the best price at the time was between $20 and $80. That’s because company leaders wanted to make sure that their stock price wouldn’t drop too low during a selloff and wouldn’t go over 10 percent during a bull market either.
“Nobody was willing to pay over 10 dollars for a stock share,” Stovall said. People would also think that a stock’s price was its value instead of using metrics like price-to-earnings or price-to-book, he said. In this case, a stock with a high price could be thought of as pricey.
In the past, there were also worries about the difference between “odd lots,” or orders for seven shares, and “round lots,” or orders for 100 or 200 shares. He said, “Odd lots cost more than round lots, and stock splits made round lots cheaper.”
Now, though, most people can trade for free, so that’s no longer a problem.
The number of splits has also gone down because management teams have changed the way they think. Executives started to believe that having a higher mindset would make them stand out and show investors “that the company must be doing something right,” Stovall said. He also said that Berkshire Hathaway Inc. BRK.A, -0.10% BRK.B, -0.09% helped make that idea happen.
It’s still true today, but Stovall said, “You know, sometimes you can have too much of a good thing.” Recently announced splits by Nvidia, Broadcom AVGO, +3.34%, Walmart Inc. WMT, +0.48%, and Chipotle CMG, +0.20% aim to make their share prices more appealing. Last year, executives mostly held off on splits to see if the bull market could keep going.
Since fractional trading came along, a stock price above $1,000 doesn’t always stop investors from buying. For example, Chipotle and Broadcom both had stock prices above $1,000 when they announced their splits, and Nvidia did too when its split went into effect. Still, many companies that have recently announced splits said they were doing these things to make it easier for people and employees to buy and sell shares.
What does that mean for the market as a whole? Stovall is curious about whether splits that are meant to make share prices look better are more like something that happens near “the end [rather than the beginning of a stock market advance.”
There are other possible reasons to split stocks as well. In Nvidia’s case, a lower stock price might make the company a more appealing candidate in the price-weighted Dow Jones Industrial Average DJIA. In this index, high stock prices have a big effect on performance, so the people who run it don’t even consider new companies with high prices.
Also, Nvidia’s stock “probably got a little octane boost” when the company said last month that it was going to split. “People who tried to copy it would be crossing their fingers that it would work for them too,” Stovall said.
There are, however, about 10 companies in the S&P 500 whose stock prices are still above $1,000. This group is led by homebuilder NVR Inc. NVR, -0.73%, whose stock price closed Friday above $7,600, and online travel company Booking Holdings Inc. BKNG, +0.08%, whose stock price closed Friday above $3,800.
