Stock splits: The strange exception where a lower stock price can be better for investors

NEW YORK — In some rare cases, a lower stock price can actually be a boon for investors.

Consider Nvidia, the chip company whose stock price has soared well above $1,000 as Wall Street's frenzy around artificial-intelligence technology keeps revving higher. The company recently said it would undergo a stock split, where each of its investors in early June will get nine additional shares for every one that they already own.

Such a split should send Nvidia’s stock price down by about 90%, all else equal. Each investor would still, though, hold as many total investment dollars in Nvidia as before the split.

Nvidia said it's making the move to make its stock price more affordable for its employees and for other investors. An investor may be more willing to buy a stock with a $100 price tag than one that costs $1,000, even if some brokerages allow investors to buy fractions of a company’s share.

What’s more, if history is a guide, Nvidia could see its stock prices continue to rise more than the rest of the market. “Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index,” according to the BofA Global Research’s research investment committee.

Of course, some of that outperformance may be because companies that tend to undergo splits usually do so only after a run of success where their stock prices have climbed strongly. And a stock split doesn’t guarantee an ensuing rise in price. Look at Tesla, which fell nearly 12% in the year after it announced a three-for-one stock split on Aug. 5, 2022. The S&P 500 rose 8% over that same time.

Tesla was one of the 30% of companies that announced stock splits that saw their share prices drop in the ensuing year. A few outliers that did particularly well, such as Copart's 56% following its October 2022 announcement, also helped drive up the overall numbers.

But the strategists at Bank of America found that the edge in performance for companies that announce stock splits also carried through all kinds of different markets. That includes not only 1990 to 1999, when the U.S. economy kept powering higher, but also from 2000 to 2009 when the dot-com bubble and then the housing bubble burst.

The strategists said in a BofA Global Research report that stock splits could also offer an easier way for companies to help their shareholders, rather than pumping cash into repurchases of their own stock, which may look expensive as stock indexes sit near record highs.

Eight companies have announced stock splits so far this year, according to Bank of America, including Walmart and Chipotle Mexican Grill. That's down from the booming days of the late 1990s when more than 60 companies routinely announced splits each year.