Stock Splits in 2022: An Interesting Stock Event

When a firm announces a stock split or reverses stocks split, there is a lot of attention. A stock split occurs when a corporation either multiplies the number of shares issued or divides existing shares to increase the total number of outstanding shares while simultaneously decreasing the per-share price. While a split will reduce the per-share value, it will not affect the value of the underlying company or the total value of your holdings.

However, lower stock prices for a rising business draw attention from regular investors. Apple (NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA) saw their share values skyrocket after announcing a 4-for-1 split in August 2020 and July 2021, respectively.

In 2022, several notable splits grabbed attention. The specifics of a stock split and other relevant information are provided below.

Understanding the Meaning of Stock Splits

Increasing the total number of shares in circulation while decreasing their value is the goal of a stock split, a corporate move taken by firms. So, when a corporation’s stock price goes up, its shareholders’ returns go up. However, the stock price may rise, so new investors find it prohibitive to purchase shares.

Each outstanding stock in a corporation is divided into a predetermined number of new shares whenever a stock split occurs. Affected shareholders will receive several shares equivalent to their pre-split holdings in the corporation.

Stock Splits in 2022

Extensive technology businesses, which have experienced significant growth this year and anticipate continuing that trend for the foreseeable future, have led the way in stock splits this year, as is typical.

Amazon

For shareholders of record as of May 27, 2022, Amazon’s board of directors approved a 20-for-1 stock split in March 2022. Due to its rapid and sustained expansion over the years, Amazon stock currently fetches a price per share of over $2,000. After the split, the price per share will be a little over $100, down from the current level of over $200. Amazon’s shares were last split on Sept. 1, 1999, at a ratio of 2-to-1.

Alphabet

While reporting earnings for the fourth quarter of 2021 in February 2022, Alphabet also announced a stock split of 20 for 1. On Jul. 15, 2022, for each share of stock owned on Jul. 1, 2022, shareholders of record will be issued 19 extra shares. Before changing its name from Google to Alphabet, the corporation divided again in the early years of 2014.

Shopify

Shopify’s co-founder and current CEO, Toby Lütke, will retain his voting control over the company according to revisions announced in April 2022. The business also said it would perform a 10-for-1 stock split on Jun. 28, 2022, for stockholders of record as of Jun. 22. As part of its strategy for sustained expansion, the maker of e-commerce software hopes to broaden the pool of people who can buy shares in the company. Since its initial public offering (IPO) in 2015, this will be the first time Shopify stock has split.

DexCom

DexCom, a provider of glucose monitoring equipment, recently announced a 4-for-1 stock split for March 2022. For stockholders of record as of May 19, 2022, the business will distribute new shares on Jun. 10. For DexCom, this is the first stock split in the company’s history.

Tesla

The Securities and Exchange Commission (SEC) received a report from Tesla in late March 2022 detailing the company’s intention to present a stock split proposal to a vote at the upcoming annual shareholders meeting. The three-for-one split was adopted during the company’s annual shareholder meeting on Aug. 4, 2022. Back in August 2020, Tesla completed a 5-for-1 stock split.

Palo Alto Networks

In August 2022, Palo Alto Networks, a leading cybersecurity company, said it would begin a 3-for-1 stock split. Prices were modified for trading on Sept. 14, 2022, the day after the separation was finalized. Palo Alto Networks’ stock split for the first time.

The Explanation For Stock Splits

Both forward and backward stock splits don’t affect an investor’s percentage ownership in a firm or its intrinsic value. For instance, if you have a pizza slice representing a quarter of the overall pie, you can still get a quarter of the pizza even if you divide it into eight equal pieces.

What business reason may there be for a stock split if it doesn’t alter the company’s structure in any significant way? Attracting new investors is often a driving factor. Numerous small investors are attracted to a famous company when its share price drops.

Furthermore, many publicly traded companies provide employees with stock-based pay that gives them a stake in the company. With a lower stock price, it’s easier for companies to control the benefits they offer to employees.

In addition, many businesses offer returns to their stockholders through share repurchase programs. Once again, a lower per-share price can help a business control costs and maximize shareholder returns.

Consider the success of Amazon. The company stated in its filing for a split that “The proposed action would enable our workers to have more flexibility in managing their equity in Amazon and make the price of shares more accessible to individuals interested in participating in the company.”

Conclusion

A stock split is not a good reason to invest in a firm if you want to hold onto your shares for more than a few years. There may be valid business reasons for a firm to initiate a split, but it doesn’t alter the fact that shareholders still get the same amount of value from the company.

Instead, investors should consider the company’s long-term secular growth trends, growth relative to its rivals, profit margins, balance sheet health, and other variables before considering whether to invest based on a stock split.

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Source: Fool