Are Stock Splits Good News for Investors?

Uncover - Stock splits

Author: Tim Phillips

October 17, 2020

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A range of market commentators have been only too quick to slam tech giants Apple Inc (NASDAQ: AAPL) and Tesla Inc (NASDAQ: TSLA) for their stock splits.

“This will lead to a reduction in quality shareholders”. “In a world of commission-free trading and fractional shares, stock splits literally don’t matter”.

These were just some of the comments that followed after both companies’ share prices rose in response to the stock splits. This got me thinking about stock splits and how we, as retail investors, view the stock markets longer term.

As some background, Apple recently split its stock 4-for-1 while Tesla carried out a 5-for-1 stock split. Why? Because their share prices were deemed “high” and the companies wanted to tap a new base of investors.

Apple shares were trading around US$500 per share just before its split while Tesla’s was much higher at over US$2,000.

Does it really matter?

Yes. What’s perhaps lost amid the short-term spike in Apple and Tesla’s share prices, is the fact that this does indeed open up a whole host of new investors to both stocks.

Being able to quantify them as being “quality shareholders” or not is completely subjective. And unfortunately, looking at it through the lens of a fractional share and commission-free lens is a uniquely US-centric approach – “we can do it here in America so the rest of the world must be able to as well”.

In reality, though, commission-free and fractional share trading (where you can buy fractions of one share) may be commonplace in the US, but in all other countries it’s far from the norm.

Yet foreign investors like you and me are starting to make up a bigger and bigger proportion of the US stock market.

According to Goldman Sachs, foreign investors could buy up to US$300 billion worth of shares in 2020:

“Foreign investors will continue to be net buyers of US stocks this year and will replace corporations as the largest source of equity demand (+US$300 billion)”.

You can see why. The Covid-19-induced lockdown has gotten more people looking at US stocks markets given their ease of accessibility.

Sure, some of these foreign investors might be short term traders who take their money out after Covid-19 passes but a fair number of them will likely stick around too.

Now, think of a new investor here in Singapore who has US$5,000 to invest. They want to buy one share of Tesla (because that’s the minimum they can buy).

That would have cost them a hefty US$2,200 before its stock split – amounting to 44% of their available cash.

Post-split, Tesla shares are now trading at around US$420, making that purchase a much more palatable 8.4% of their total investable amount.

Are stock splits pointless?

Not if you’re an overseas investor. And companies like Apple and Tesla are international, world-class brands with reputations to match.

Interestingly enough, Apple has carried out four previous stock splits prior to its latest one. How did it perform one year following those share splits? Pretty well it turns out.

Besides one stock split carried out just before the dot-com bust of 2000, the other three saw strong outperformance versus the S&P 500 over the following year.

One of its more recent stock splits (a 7-for-1 stock split in 2014) generated returns of 36% one year later, comfortably beating the S&P 500’s 6.6% return over the same period.

Where were all the Apple stock-split haters in 2014? Just because Apple and Tesla have both had a phenomenal 2020, does not mean that we – as long-term investors – should not be able to see the forest for the trees.

Focus on the long term

By shunning this short-term market noise, we can stick to our long-term investment goals.

Apple was a great company back in 2014. That hasn’t changed just because it split its stock. In financial markets, commentators tend to think of how institutions manage their money. How we do it on a personal level can actually be a lot different.

We have the luxury of looking longer term, not under pressure to meet performance/return targets. We shouldn’t forget that fact as we look to keep buying the best companies and holding them for the long term.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.