Should You Buy a Stock After a Split?
Originally published at https://www.schaeffersresearch.com on June 8, 2022.
Some of the most popular names in trading have become — or are about to become — a lot more affordable. Amazon.com (AMZN) completed a 20-for-1 stock split which slashed its price from over $2000 to about $120 per share. Meanwhile, Google-parent Alphabet (GOOGL) will split its stock 20-for-1 on July 1st, and Tesla (TSLA) will ask shareholders to approve a split later this year so the details aren’t yet known. Current shareholders receive a proportionate number of shares, so the market value of their holdings is unchanged. With stock splits in the news, it’s worth looking at how stocks have behaved after splitting shares.
Stock Returns After Splits
A stock split changes nothing fundamentally about a company and, theoretically, should not affect returns going forward. It does, however, lower the stock price which could increase demand for shares from retail traders who don’t want to spend or can’t spend over $2,000 for a single share of stock. The analysis below shows how stocks have tended to behave after stock splits.
Looking at current optionable stocks going back to 2010, I have data on about 190 stock splits. The table below summarizes how stocks performed following those splits. The second table is for comparison and shows what the returns would have looked like if instead of buying the stocks, you bought the broad-market S&P 500 Index (SPX) instead.
Based on the numbers, stock splits are not a reason to buy. Stocks that split underperformed in the short term, and do not significantly beat the market in the longer term. In the two weeks immediately following a split, the stocks averaged a loss of 0.43% with only 43% of the returns beating the SPX. Once you get out to three months, there’s not a lot of difference in average return between buying the stocks and buying the S&P 500. Investing in the general market, however, yields a lot less volatility.
Most stock splits are 2-for-1 splits. So, I was curious if anything changes by looking only at splits in which shareholders receive a larger number of shares. The table below summarizes the returns for splits of 4-for-1 or greater. I have 33 data points with some mixed results. As before, the shortest time frame of two weeks shows bearish stock returns. Stocks splitting with a ratio of 4-for-1 or greater averaged a loss of 1.40% in the next two weeks with only 36% of the returns beating the SPX. The average return at one and three months beat the corresponding S&P 500 returns, but showed bearish returns at six months. Whether it’s a general 2-for-1 stock split or a bigger ratio, the split by itself is not a reason to buy.
Originally published at https://www.schaeffersresearch.com on June 8, 2022.
