Volatility is something that’s inescapable for investors on Wall Street. With the exception of 2024, we’ve witnessed the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite seesaw between bear and bull markets in successive years since this decade began.
During bouts of heightened volatility and uncertainty, professional and everyday investors typically turn their attention to businesses with lengthy track records of outperformance. Over the last three years, companies enacting stock splits have certainly fit the bill.
Investors are rightly gravitating to stock-split stocks
A “stock split” is an event that allows a publicly traded company to alter its share price and outstanding share count. It’s a purely cosmetic change in the sense that adjusting a company’s share price and share count by the same factor has no impact on its market cap or operating performance.
Forward-stock splits are designed to make a company’s shares more nominally affordable for everyday investors who may not have access to fractional-share purchases with their online broker. Meanwhile, reverse-stock splits aim to increase a company’s share price to ensure it meets the minimum listing requirements on a major stock exchange.
For all intents and purposes, most investors seek out companies enacting forward-stock splits. A public company with a high-flying stock often possesses well-defined competitive advantages and has, in many instances, out-innovated their competition. In other words, forward-stock splits can act as a beacon to alert investors to Wall Street’s top companies.
Since the midpoint of 2021, close to a dozen top-tier businesses have enacted or announced a forward split, including the likes of Nvidia, Amazon, and Alphabet. Earlier this week, another brand-name company announced its intent to join this elite group of stock-split stocks.
Walmart and Chipotle Mexican Grill have claimed the stock-split spotlight in 2024
Following a relatively quiet 2023, which saw just a few top-notch companies announce stock splits (e.g., Monster Beverage and Novo Nordisk), 2024 has kicked off with a bang.
In late January, retail titan Walmart (NYSE: WMT) announced plans to conduct a 3-for-1 split. The purpose of this split, which was Walmart’s first in nearly a quarter of a century, was to help its associates take part in the company’s Associate Stock Purchase Plan. Reducing its share price by a factor of three will make it easier for its employees to purchase whole shares of stock.
Walmart’s long-term outperformance — and the reason its share price merited a 3-for-1 split that was effected on February 26 — can be explained by its size. The company’s deep pockets allow it to purchase products in bulk and at a lower cost than its peers. It’s consistently undercutting grocery chains and local stores on price, which is a clear lure to consumers.
Walmart’s stores also carry a broad selection of stock keeping units (SKUs). Not only does this help the company sell higher margin discretionary goods, but it prompts consumers to make Walmart their one-stop shopping destination.
The other superstar that’s taken center stage in 2024 is fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG). In mid-March, Chipotle’s board announced plans to conduct a 50-for-1 forward split that would take effect on June 26 (assuming shareholders approve the split at the company’s annual meeting in June).
Similar to Walmart, Chipotle is conducting a split to make its nearly $3,200-per-share stock more accessible to its employees. If shareholders give Chipotle the green light, its shares will trade closer to $64 by late June.
The better than 14,300% increase in Chipotle Mexican Grill’s stock since its initial public offering in January 2006 reflects consumers’ willingness to pay more for healthier foods. Further, the company’s limited menu helps its staff prepare meals quickly, which ensures a timely delivery process to in-store and drive-thru (“Chipotlane”) customers.
But it’s time for Walmart and Chipotle to move over, because there’s another high-profile company that’s ready to share the stock-split spotlight.
Say hello to Wall Street’s newest stock-split stock
On May 14, consumer electronics juggernaut Sony Group (NYSE: SONY) threw its hat into the ring and announced its intent to conduct a 5-for-1 forward split.
Although the record date of its stock split is set for September 30, the effective date will be a bit different for its Japanese-listed shares and American Depository Receipts (ADR) in the U.S. Whereas its shares in Japan will begin trading at a reduced nominal share price on October 1, the U.S. ADRs have an effective date of October 8. When complete, this split will lower Sony Group’s U.S. shares from the $81 they closed at on May 14 to around $16.
Most people are familiar with Sony because of its longtime ties to the gaming industry. The company’s PlayStation 5 gaming console debuted back in November 2020, so it’s not all that surprising that unit sales haven’t been all that strong of late.
Thankfully, Sony has seen a healthy uptick in PlayStation Plus revenue. PlayStation Plus is the company’s gaming subscription service that ranges from $10 per month to $160 per year, depending on the subscription tier. It allows subscribers to back up their saved gaming data to the cloud, as well as join friends in multiplayer games. The key point here being that subscription revenue tends to generate predictable, high-margin revenue year after year.
But there’s more to Sony Group than just its PlayStation gaming console. For instance, it’s one of the key producers of image sensors used in next-generation smartphones. Inclusive of favorable currency exchange rates, imaging and sensing solutions sales jumped by 14% in the company’s latest fiscal year (ended March 31). With global smartphone sales expected to modestly expand this year, Sony should be a clear beneficiary.
Wall Street’s newest stock-split stock has a profitable film entertainment segment, too. Sony Pictures delivered 9% sales growth last year, with an increase in theatrical releases paving the way for this growth. Sony Pictures is also working with private-equity firm Apollo Global Management and mulling a firm bid for legacy media company Paramount Global. The two companies recently sent a nonbinding offer to Paramount’s board that would take the company private at a $26 billion valuation, including the assumption of debt.
The cherry on the sundae for Sony Group and its shareholders is that the company also announced a share repurchase authorization along with its 5-for-1 stock split. Over the next year, a maximum of 30 million shares can be repurchased, which represents nearly 2.5% of the company’s outstanding shares (based on its outstanding share count after its coming split).
For time-tested businesses with steady or growing net income, buybacks can increase earnings per share (EPS) and make a company’s stock appear more attractive to fundamentally focused investors.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Chipotle Mexican Grill, Monster Beverage, Nvidia, and Walmart. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
Move Over, Walmart and Chipotle: Wall Street Has a New Stock-Split Stock was originally published by The Motley Fool