Apple, Tesla could help stock splits regain popularity
Just when it looked like stock splits were dying out, two of the nation’s most valuable companies — Apple and Tesla — announced splits in recent weeks.
On July 30, Apple announced a fourforone split “to make the stock more accessible to a broader base of investors.” After the market closed Tuesday, Tesla announced a fiveforone split “to make stock ownership more accessible to employees and investors.” Both stocks will begin trading on a splitadjusted basis Aug. 31.
When a split takes effect, the company issues more shares, and its share price drops proportionately. In a 2for1 split, for example, the company doubles its share count and its share price drops by half, absent any psychological or other factors such as an earnings surprise or dividend increase.
Splits made sense — and were far more popular — back in the day when investors got a discount on commissions when they traded a “round lot” of 100 shares. Then, splits meant more investors could buy a round lot.
But that rationale has nearly evaporated since stock trading commissions were deregulated in 1975 and the discount brokerage industry, led by Charles Schwab, arose. Today, many discount brokers charge zero commissions and some including Schwab, Fidelity and Robinhood let investors purchase fractions of a share.
“Tesla’s decisions have always been driven by a desire to appeal to the mass market, so we view the stock split as a way to appeal to the investing mass market, i.e. retail investors,” Garrett Nelson, a senior stock analyst with CFRA Research, said in an email. “Also, (Tesla CEO Elon) Musk has never been one to pass up the opportunity to create a headline, and not every broker offers fractional share purchases at the moment.”
High share prices can also be a problem for companies that offer broadbased employee stock purchase plans, said Barbara Baksa, executive direc
tor for the National Association of Stock Plan Professionals. These plans typically let employees set aside a percentage of pay to purchase company stock every three or six months, usually at a discount to the market price on the beginning or end date of the purchase period, whichever is lower. Most do not allow fractional share purchases. If an employee saves up enough to buy 10.5 shares, the employee would get 10 shares and the extra money would either be rolled forward into the next purchase period, or returned to the employee.
If you have a highpriced stock and a lowpaid employee, “it could take that employee a year or longer to amass a share of stock,” Baksa said. In that case “it’s hard to get excited about the plan.”
Using publicly available data about Tesla’s stock purchase plan (which runs from March through August and September through February) and median annual employee compensation ($58,455), she estimates that the median Tesla employee contributing the maximum could afford to purchase at most 6.9 shares at the end of August (with the 0.9 share amount being refunded to the employee) and three or four shares at the end of February, based on Tesla’s Tuesday price. This assumes Tesla’s stock price continues to appreciate.
Employees earning below the median could purchase less. A stock split will increase the number of shares employees could purchase.
High share prices can also pose problems with restricted stock units if they result in a small number of shares vesting or becoming available to the employee every year — or more commonly in the Bay Area, every quarter — and roughly half of those shares are used to pay the taxes due.
Mathematically, stock splits should have no impact on shareholder value. Investors own the same percentage of the company, and the same share of its earnings, before and after a split. The value of their holdings should not go up or down as a result of the stock split itself.
Yet studies have shown that a company’s stock price tends to rise more than the overall market around split announcements, and the price increase “is relatively sticky,” said Alon Kalay, an assistant professor of accounting at the Broad College of Business at Michigan State University.
“The question is why,” he said.
There are various theories. Kalay said he believes that splits happen after a period of positive performance, and investors perceive that management would not have split the stock if they thought their performance was temporary.
Tesla’s shares rose $180.37 per share, or 13% on Wednesday, the first trading day after its split, compared to a 1.4% increase in the S&P 500. Apple’s shares surged 10.5% to a record $425.04 the day after its announcement, walloping the overall market. They closed Wednesday at $452.04.
Nevertheless, stock splits have gotten much less common over the past decade. Between 2010 and 2019 — as prices were marching upward — only 99 companies in the S&P 500 split their stock, compared to 310 in the previous decade and 646 the decade before that.
Since 2016, only 26 S&P companies have split their stock.
“Companies used to keep their stock in the $50$60 range,” said Howard Silverblatt of S&P Dow Jones Indices. “When it got out of hand, they did a split.”
Today there are 48 stocks in the index trading between $250 and $500, eight between $500 and $1,000 and seven over $1,000. The $1,000plus club includes Alphabet (Classes A and C), Amazon.com, AutoZone, Booking Holdings, Chipotle Mexican Grill and NVR. Tesla is not in the index. Neither is Berkshire Hathaway Class A, which trades around $320,000 per share.
One possible reason for splitting a highpriced stock is for potential inclusion in the Dow Jones industrial average. Unlike the S&P 500 and most other indexes, which are weighted by each company’s market value, the 30 Dow stocks are weighted by each company’s price. As a result, highpriced stocks have an outsize influence in the Dow’s movement.
It may be no coincidence that Apple was added to the Dow in 2015, after it split its stock 7for1 in 2014. After Apple’s 41 split takes, its weighting in the Dow will drop from about 10.84% to 2.95% (based on Tuesday’s close.)
It’s still early, but “we might see a resurgence in splits,” Kalay said. “Because we are in an environment where things are very uncertain, you could argue that every time somebody has nontemporary (positive) performance, they’re going to let you know.”