Stock splits became a hot trend in 2022. Well, until share prices slid

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Stock splits emerged from dormancy in 2022, as a number of high-profile technology companies and even a large Canadian bank reduced their nominal share prices.

But the re-emerging trend has hit an obstacle: Poor share performance among the likes of Shopify Inc. SHOP-T, Amazon.com Inc. AMZN-Q and Google parent Alphabet Inc. GOOGL-Q Is the uptick in stock splits about to fizzle out again?

When a company splits its stock, the value of an investor’s holding does not change. A split merely swaps an expensive share for two less expensive shares, in the case of a 2-for-1 split.

An investor who held 100 shares trading at $200 each, prior to a 2-for-1 stock split, would have 200 shares trading at $100 each after the split. In both bases, the investment would be worth a total of $2,000.

That’s why most observers don’t get very excited about stock splits and the practice of splitting stocks has grown relatively rare over the past couple of decades.

Companies used to split their stocks frequently because cheaper shares were more affordable for small investors who had to buy board lots of 100 shares each. More affordable shares translated to greater investor support.

Now, with modern online trading platforms, shares can be bought in any quantity, including individual shares and fractional shares, which is a key reason why stock splits have fallen out of favour in recent decades.

In the 1990s, there were an average of 58 stock splits a year among companies in the S&P 500, according to data from Birinyi Associates. This average dwindled to just eight splits a year in the 2010s. There were just five stock splits in 2021.

Nonetheless, 2022 brought a flurry of activity from some of the most recognizable names – and top long-term performers – in the stock market.

Alphabet announced a 20-for-1 stock split in February: It granted investors 20 shares for every one they already owned, reducing the tech company’s share price from about US$2,582 to US$129 when the action was completed in July.

In March, Amazon.com also announced a 20-for-1 stock split. Shopify, consistently one of the most popular stocks among Canadian retail investors last year according to Toronto-Dominion Bank, announced a 10-for-1 split in April. Tesla Inc. announced a 3-for-1 split in August.

The activity wasn’t solely confined to large and successful technology companies, though. Canadian Imperial Bank of Commerce announced a 2-for-1 split in February, marking the bank’s first split in 25 years and the first among any large Canadian bank in eight years.

“It doesn’t create shareholder value, in our view,” Dave McKay, chief executive officer at Royal Bank of Canada, said during the bank’s annual general meeting this year.

Even though stock splits don’t enrich investors, they can attract a lot of attention.

According to a Bank of America analysis, stocks outperform the broader market, on average, 12 months after a split. Split stocks have rallied by an average of 25 per cent over this one-year period, compared with a 9 per cent gain for the S&P 500.

The most common explanation: Companies tend to split their stocks after a strong run-up in the share price, and the momentum often continues after the split.

As well, some investors may believe that the decision to split a stock reflects management confidence, providing a glimpse into insider bullishness.

Tony Comper, Bank of Montreal’s CEO in 2001 when the bank split its stock 2-for-1, supported this view when he said that it “demonstrates our confidence in the bank’s progress to date and its future prospects.”

The problem in 2022? Companies that split their stocks have been struggling, underperforming the broader market and raising the question of whether stock splits could become rarities again.

Since its announcement, CIBC’s share price has tumbled 22 per cent, to the end of November, underperforming its peers in the Canadian banking sector.

Alphabet’s share price has tumbled 31 per cent since its stock split announcement, to the end of November. Shopify has fallen 35 per cent, Amazon has fallen 34 per cent and Tesla has fallen 42 per cent.

These declines have little or nothing to do with the splits themselves. Instead, surging inflation sent interest rates higher, undermining the valuation of tech stocks and – in CIBC’s case – eroding optimism in the North American economy and the Canadian housing market.

Still, for investors who enjoyed the undeniable satisfaction from seeing, say, five Alphabet shares morph into 100 shares, the subsequent declines offer a sobering reminder that stock splits may be rare for a reason: In 2022, at least, they served no purpose.

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