Why a stock split can be a bullish move for companies

Nvidia (NVDA) has announced a 10-for-1 stock split following its first quarter earnings beat. Historically, companies that undergo a stock split tend to outperform the S&P 500 (^GSPC), according to research by Bank of America. A stock split aims to make the shares more accessible to a wider range of investors.

Yahoo Finance's Julie Hyman and Jared Blikre shed light on the benefits of stock splits for companies.

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This post was written by Angel Smith

Video transcript

Video this week announcing a 10 for one stock split.

It's the eighth stock split announced by a company so far this year.

And historically, these moves have been bullish for the companies that announced them.

And analysis by Bank of America showed that on average companies announced a stock split, they performed S and P five, they outperformed the S and P 500 index in the following year and it's not by a little, it's by a lot.

And I was thinking about this, why would this be and they break it down by decades?

So it doesn't matter which decade you look at here.

Uh Stock splits tend to be good for performance.

Why would that be though?

Maybe because that's a good problem to have if you have to have a stock split, that's because you've been doing well in your stock.

The price has gotten a little bit out of range for the everyday ordinary investors.

So I think it's just the cohort, the group lends itself to that.

Well, I find this such a fascinating phenomenon because theoretically I can today buy 1/10 of a share of NVIDIA, for example, or quarter of a share of India, but there's just something psychologically about owning one share.

And obviously there's an affordability difference between having a stock that is worth $100 a share and one that I have to pay $1000 a share for.

So you see sort of the psychological importance of it.

What's interesting to me is that that number is pushed up by the average quite a bit because 30% of the time stocks after they split are down 12 months after.

So, you know, it's still the, it's still the majority of the time and the majority of the stocks that experience an increase.

But there are, there is a substantial minority that does have declines.

The other thing, interesting thing that Bank of America looked at is that there's been over time a dip in the number of splits.

But recently, there's been a little bit of a resurgence and they pinpoint 36 companies in the S and P 500 that are above $500 a share.

So maybe there would, they would be the next up that potentially eligible for something like this.

And not only that, there's a side bet that if a company, a big company that's getting a lot of headlines, splits its stock, maybe it's gonna join the dow, you know, something along that line.

Um That's not the case here.

We've heard no inklings of that, but there's a lot of speculation, right?

Because the dow is a price weighted average.

Uh, the folks who put it together don't want to put a very high price stock in there because it'll really skew the apple before it was admitted to the dow.

They did a stock split.

So that's where that comes from.

So we'll see if it ends up happening.