Stocks That Split Usually Outperform the Market
After seeing its share price rally from less than $150 to $1,150 over the past 18 months, Nvidia recently announced a 10-to-1 stock split that is going to be completed later this week. All shareholders of common stock at market close on Thursday, June 6, will receive nine additional shares when the split happens after the closing bell on Friday. By splitting its stock 10-to-1, Nvidia is bringing its share price down to a level that makes it more accessible to retail investors, who may want to invest less than the $1,150 the company’s share currently cost.
When announcing the split, Nvidia said that it’s doing so “to make stock ownership more accessible to employees and investors.” And while that sounds like a nice thing to do, it’s not like a stock split is a selfless act. By making its stock more accessible to smaller investors, a company – in this case Nvidia – is increasing the number of potential buyers of its shares, which usually has a stimulating effect on stock demand and thus its price.
Historically, companies that split their stock have often outperformed the market in the months that followed. As the following chart, based on data from Bank of America’s Research Investment Committee shows, stocks that split beat the S&P 500 on average by a significant margin in each of the past four decades. Overall, companies that split their stock saw an average total return of 25.4 percent in the 12 months that followed the announcement of their split. That’s more than twice the average return of the S&P 500 during those periods.
By splitting its stock 10-to-1 and bringing its share price down close to $100, Nvidia is improving the chances of keeping its rally going for longer, explaining why the announcement alone caused another spike in the company’s stock price.