Additional Shares & Reduced Price: Understanding Stock Splits

Stock splits have recently become a popular topic among investors. This follows stocks like NVIDIA announcing a 10-for-1 split, where its shares later traded 10x lower than their previous price, and investors received nine additional shares for every share they owned.

What is a stock split?

In short, when a stock split occurs, the number of outstanding shares increases, and the price per share decreases, making full ownership of a single share more affordable for employees and retail investors.

• For investors, full share ownership often comes with voting rights, depending on the share class, unlike fractional shares.
• Employers could offer shares to employees alongside company income, making full ownership of a single share more affordable through stock splits and enabling employees to grow with the company they work for.

Stock splits often take place when a company’s shares grow over time; this could also increase the chances of top tech stocks being included in the Dow Jones Industrial Average, where no stock trades above $500.

NVIDIA’s recent stock split resulted in shares trading around $120 once the split was completed, currently trading at $130. When releasing its results, NVIDIA stated, “The next industrial revolution has begun — companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center — AI factories — to produce a new commodity: artificial intelligence.” They added that the split would “make stock ownership more accessible to employees and investors.”

Splitting shares doesn’t change a company's fundamentals but lowers the share price. An academic study published in the Journal of Risk and Financial Management in 2023 revealed that stock splits also aim to:

• Make it easier for small investors to buy round lots.
• Keep the stock price within an optimal range.
• Increase the number of shareholders.
• Attract new investors or speculators.

Bank of America analysts see this as a trend in the tech sector. NVIDIA's split follows similar moves by Alphabet, Amazon, and Tesla since 2022 and Apple in 2020. Chipotle Mexican Grill, Broadcom Inc., Lam Research Corporation, Sony Group, and Cintas Corporation are among the big names also preparing to undergo a stock split.

Chipotle Mexican Grill, Inc

• Stock split ratio: 50-for-1
• Expected share price: around $60 (current share price $3,272)

Chipotle Mexican Grill, Inc., a market leader in the fast-food industry with over 3,400 restaurants as of December 31, 2023, in the US, Canada, UK, France, and Germany, announced a 50-for-1 stock split, which, according to the company, is one of the largest in New York Stock Exchange history.

Regarding the important dates, Chipotle explains that “Shareholders of record as of June 18, 2024, will receive 49 additional shares for each share held, which will be distributed after market close on June 25, 2024.” The Chief Financial and Administrative Officer added, "We believe the stock split will make our stock more accessible to our employees as well as a broader range of investors.”

Broadcom Inc.

• Stock split ratio: 10-for-1
• Expected share price: around $170 (current share price $1,735)
  

Broadcom Inc. (NASDAQ: AVGO), a global technology leader specializing in semiconductor, enterprise software, and security solutions, announced a 10-for-1 stock split following the company's strong revenue report.

The CEO stated, “Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds.”

The CFO explained that the stock split aims to make shares accessible to investors and employees. “Our stockholders of record after the close of the market on July 11, 2024, will receive an additional nine shares of common stock for each share held after the close of the market on July 12, 2024.”

Lam Research Corporation

• Stock split ratio: 10-for-1
  
• Expected share price: around $100 (current price $1,035)

Lam Research Corporation, a supplier of cutting-edge wafer fabrication equipment and services to the global semiconductor industry, announced a 10-for-1 stock split along with a $10 billion share buyback.

A share buyback is when a company buys its own shares in an attempt to boost its share price over time. “The share repurchase authorisation announced today will execute over an indeterminate period of time and is consistent with our plan to return 75% to 100% of free cash flow to stockholders,” the company explained.

Regarding the stock split, Lam Research said it would “enable a larger proportion of Lam's worldwide employee base to participate in the company's employee stock plans... the stock split is expected to be effective after market close on Wednesday, October 2, 2024, for stockholders of record at that time. Lam Research's common stock will begin trading on a post-split basis at the market open on Thursday, October 3, 2024."

Sony Group Corp

• Stock split ratio: 5-for-1
• Expected share price: around $16 (currently trading at $82 per share)

Sony Group, a prominent Japanese multinational conglomerate and owner of Sony Interactive Entertainment (PlayStation), Sony Pictures, Sony Music, and financial services under Sony Financial Group, announced plans to conduct a 5-for-1 stock split.

The company explained that the reason for the split is to “lower the amount per investment unit (full share) to make it easier for investors to invest and expand the investor base.”

Each share of Sony's common stock recorded as of September 30, 2024, will be split into five shares.

“There will be no change in the exchange ratio of ADRs to underlying shares, which will remain 1 ADR = 1 share of common stock.”

Cintas Corporation

• Stock split ratio: 4-for-1
• Expected share price: around $171 (currently at $684 per share)

Cintas Corporation, an American company offering businesses uniforms, mats, mops, cleaning and restroom supplies, first aid, safety products, and more, also indicated it would proceed with a 4-for-1 stock split.

“Cintas shares are trading near record highs as a result of our steadfast focus on serving our customers. We believe that the time is right to split the stock and increase its accessibility to our employee-partners and investors so that they can continue to share in the future growth of Cintas,” the CEO explained.

Shareholders of record as of September 4, 2024, will receive three additional shares per share held, distributed after market close on September 11, 2024. Cintas' shares will trade on a post-split basis starting September 12, 2024.

Conclusion

Although stock splits can be seen as signs of growth and stability in a company, it’s also worth noting that, according to Bank of America, splitting shares doesn’t guarantee outperformance; about 30% of stocks that split had negative returns after 12 months. Trivariate Research found mixed results for megacap companies that split shares in the following year.

Share buybacks, on the other hand, reduce the number of outstanding shares, which could contribute to increasing a company’s stock price over time.

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