Blog
The Year of the Stock Split
Finance/ Economy
Jun 11, 2022
The Elon Musk-led electric automaker recently announced plans to split its stock. The action will still require shareholder approval and likely won’t be made official until the company’s annual shareholders’ meeting in August. Nonetheless, the planned stock split comes on the heels of the company’s previous 5-for-1 stock split that was announced less than two years prior, on August 11th, 2020.
A Primer on Stock Splits
On their own, stock splits are little more than a simple mathematical exercise. For example, when a company announces a two-for-one split, the price per share halves and the total number of shares outstanding doubles.
Suppose a publicly-traded company has 1 million shares outstanding and trades at $20 per share. It has a market capitalization of $20 million. If the company announces a 2-for-1 stock split, its stock price drops to $10 per share, while its shares outstanding doubles to 2 million.
Though both the outstanding share and share price figures have changed, the company is still worth $20 million, at least in theory. In reality, however, stock splits may be bullish for companies. Bank of America Securities analysts note that S&P 500 constituent companies that have split their stock have, on average since 1980, returned 25% over the next 12 months. That beats the broader index’s 9% forward 12-month return by a staggering 16%, a difference that is difficult to ignore.
Tesla
The Elon Musk-led electric automaker recently announced plans to split its stock. The action will still require shareholder approval and likely won’t be made official until the company’s annual shareholders’ meeting in August. Nonetheless, the planned stock split comes on the heels of the company’s previous 5-for-1 stock split that was announced less than two years prior, on August 11th, 2020.
Though Tesla’s stock is down about 20% year-to-date (YTD), its performance over the longer-term has been anything but lackluster. In the trailing 12 months, the Austin, Texas-based carmaker’s stock rose by over 40%. And in the last five years, the company’s stock has ballooned by more than a whopping 1,400%.
Today, Tesla’s stock trades at about $950, making it one of the 20 most expensive companies on the market to own. However, the company claims that its stock split has nothing to do with affordability. Rather, it’s looking to pay a stock dividend to its investors.