April 21, 2022

Stock Splits: Meme Stocks, the Sequel?

Earlier this week, the WSJ’s “Heard on the Street” column discussed the recent boom in stock splits. The column says that S&P 500 companies are implementing splits at the highest rate in the past 10 years. It also says that the traditional justification for a split – “democratizing access” to share ownership – doesn’t hold water in an age when retail investors can fractional shares through a variety of online trading platforms.

So what’s going on here? According to the WSJ, the stock split boom may well be the sequel to the “meme stock” craze of the last two years:

If the past few years brought the meme-stock craze, we may now be seeing a stock-split craze. Big money flooded freely into the tech sector in 2020 and early 2021 coincident with low Treasury yields. As tech stocks in particular have sold off in the past few months, companies are now having to work that much harder to make their shares stand out.

Indeed, the most important conclusion to the rise in stock splits this year, according to BofA’s investment and ETF strategist Jared Woodard, is the signal it is sending about the profound shift in management priorities “as the shareholders strike back.” Shopify has shed nearly 60% of its market value—worth some $100 billion—just this year, and even and Alphabet have lagged behind the S&P 500.

Within the S&P 500, BofA counted five stock-split announcements this year as of early last week—roughly the average annual number we have seen for companies in that index over the past five years. Assuming that pace continues, individual investors would be in a better position to take advantage of a total of about 18 stock splits from S&P 500 companies this year. And there could be far more than that: As of early February, 17% of the S&P 500 was trading above $500 a share, or 85 companies, BofA found.

After dutifully acknowledging that there’s no real financial impact from a stock split, the column goes on to discuss the pros and cons of a split, and it may make useful reading for a board that’s thinking about one. It also closes with a cautionary reminder that over the past four decades, the height of stock splits coincided with the dotcom boom, and that didn’t end very well.

John Jenkins