Stock splits allow publicly traded companies to change their share price and outstanding share count in the stock market. While a split has no effect on a company’s market cap or performance, it can attract investor interest.
There are two types of stock splits. The aim of a forward stock split is to increase the number of shares to lower a stock’s price. It’s intended to make shares more affordable for retail investors. A split ratio will tell you how many new shares are you getting for every share you hold. While the change is largely cosmetic, a forward stock split can spur interest in the stock and for that reason, it may make sense to buy stocks before they have their forward stock split.
A reverse stock split happens when the company reduces the number of its outstanding shares by combining shares. The point is to increase the price of each share. In this case, the split ratio shows how many of your shares will be exchanged for one new share.
The reverse split is usually done by struggling companies that are in danger of being delisted because their stock price is too low for the standards of major stock exchanges.
Here’s a list of four upcoming stock splits that are worth a look and another stock split that hasn’t been announced but is in the cards:
New Stock Splits to Track
These five forward stock splits are worth watching this year:
- Cintas Corporation: The maker of business supplies, including uniforms, protective apparel, mats, cleaning supplies, fire extinguishers and first aid products, plans a 4-for-1 stock split on Sept. 12.
- Chipotle Mexican Grill: One of the few restaurant chains to thrive after the pandemic, the casual chain that sells tacos, and burritos plans its first stock split in its 30-year history – a 50-for-1 split – on June 26.
- United States Lime & Minerals: The US small-cap is benefiting from inflation because its profit margins widened as the price of lime and limestone has risen. It’s planning a 5-for-1 stock split, effective July 15.
- Ebara Corporation: The Japanese maker of industrial equipment, such as pumps, chillers, fans, compressors, turbines and waste incineration plants, is planning a 5-for-1 stock split, effective July 1.
- Booking Holdings: At $3,792.53 a share, Booking Holdings, which runs Booking.com, Priceline and OpenTable, is the fourth most expensive stock on the Nasdaq. It hasn’t revealed a stock split, though.
What Is a Stock Split?
A forward stock split is a corporate action taken by a company to divide its existing shares into multiple new shares. It essentially increases the number of outstanding shares of a company’s stock without affecting the total value of the company. A reverse stock split decreases the number of existing shares in an effort to increase the stock’s price.
Here’s an example of how a split works. In a forward stock split, say a company has 10,000 shares outstanding, each priced at $100, for a total market capitalization (total value of all shares) of $100,000. If the company has a 2-for-1 split ratio, each existing share will be split into two shares and investors who had 10 shares will now have 20, and each share will be priced at $50. The company’s market capitalization remains the same after the split. The transaction just makes each share less expensive.
In a 1-for-2 reverse split of the same company, each of its shares will be worth $200. Investors who had 10 shares would now only have five. Again, the market capitalization remains the same.
Why Do Companies Split Stock?
A key reason is to improve a stock’s affordability. A high stock price can discourage some investors, particularly smaller ones, from buying the stock. While many brokers now allow investors to buy fractional shares, that isn’t the norm among retail investors.
Forward Stock Split
A split lowers the price per share, making it more attractive to a wider range of investors. It also may allow the stock to be included in certain indexes that are used by index funds. For example, Booking Holdings isn’t included in the Dow Jones Industrial Average because its high share price would outweigh others and dominate the index. If Booking had a stock split, in all likelihood, it would be included in the Dow Jones index.
A split can increase trading activity by making it easier to buy and sell shares. It can also draw attention to the company in a good way. A lower stock price can be perceived more favorably by some investors, even though the underlying value of their investment remains the same.
Reverse Stock Split
On the other hand, a company that does a reverse split almost always does it to prevent being delisted from a bourse because its share price has fallen too low. It’s rarely a good sign when a company has to do a reverse split, but sometimes it’s enough to improve the company’s finances in the long run.
A Closer Look at the Top Stocks Splits to Watch
Now, let’s take a closer look at the top stocks splits to watch in 2024
1. Cintas – Uniformly Strong on its Financials
Cintas was trading for $692.40 on the Nasdaq at the close of business on Wednesday. The planned stock split would make it easier for the company’s 44,500 employees to buy stock in their own company, which has seen its shares rise more than 48% over the past year, and more than 200% over the past five years.
Cintas has a huge customer base with more than a million customers and strong name recognition that gives it a competitive edge. In the third quarter of fiscal 2024, it reported revenue of $2.41 billion, up 9.9% year over year, and earnings per share (EPS) of $3.84, which rose 22.3% from the same quarter the year before. It also saw a record high gross margin of 49.4%, and a record high operating margin of 21.6%. The strong quarter led the company to raise its yearly predictions for revenue and EPS. It lifted its revenue goal from a range of $9.48 billion to $9.56 billion, to a range of between $9.57 billion and $9.6 billion. EPS guidance jumped from a range of $14.35 to $14.65, to between $14.80 and $15.
The company has raised its quarterly dividend for 41 consecutive years, including a 17.4% increase last year to $1.35. The payout ratio is only 33.97%, so continued increases shouldn’t be difficult.
Ticker?
P/E?
Dividend Yield
NASDAQ: CTAS
47.82
0.78%
2. Chipotle –? Split Could Attract More Investors to Stock
Chipotle’s fresh food/no freezer policy and quality fast-food has helped it thrive even with inflation cutting into competitors’ margins. The company has a loyal customer base and it continues to grow after the restaurant chain added a new order pickup service called a Chipotlane.
Priced at 3,168.30 as of May 15, its high share price may be discouraging retail investors with smaller pockets, including some of the chain’s own employees. The thought is, priced at around $63 or $64 per share after the stock split, it will lead to more investors buying the stock.
Chipotle had a strong first quarter, with revenue rising 14.1% from a year earlier to $2.7 billion, and EPS growing 23.9% to $13.01. Comparable restaurant sales grew 7% with the rest of the revenue coming from the 47 new restaurants it opened during the quarter, 43 of which had a Chipotlane.?
Ticker?
P/E?
Dividend Yield
NYSE: CMG
67.74
N/A
The Infrastructure Investment and Jobs Act has been a boon to the company because its lime and limestone is used for all types of industry, especially highway projects. While its shares aren’t that high – $373.09 as of May 15 – the company’s board explained that the split would make it more affordable to certain investors and employees and would narrow the bid and ask prices of the common stock. It will happen in the form of a dividend of four additional shares for every one investors hold. As a small-cap stock that’s not well-known, a stock split also is a good way to attract market interest.
In the first quarter, EPS rose 30.6% to $3.92 while revenue rose 7.4% to $71.5 million. USLM saw smaller sales volume but with the average selling prices for lime and limestone climbing, its margins improved.
The company also increased its quarterly dividend by 25% this year to $0.25, the fourth consecutive year it has increased its dividend. The payout ratio is around 6%, so the company has plenty of money left over for expansion or for more dividend increases.
Ticker?
P/E?
Dividend Yield
NASDAQ: USLM
26.59
0.27%
Ebara Corporation –? Continues to Pump Out Profitable Quarters
Ebara, which founded the Inokuty Type Machinery Office 112 years ago, has more than half of its business outside of Japan. It operates in several segments, building service & industrial; energy; infrastructure; environmental solutions; precision machinery and other. The energy and the environmental segments led the way in the first quarter, with revenue gains of 21.2% and 16.4%, respectively. The company’s pumps are in higher demand because global warming has increased flooding due to heavy rainfall in some areas.
In the first quarter, Ebara posted revenue of 193.8 billion yen ($1.26 billion), up 5.3% year over year, and EPS of 158.97 yen, up 81% from the same period a year ago. Its full-year guidance points to 8.9% growth in revenue to 827 billion yen, and EPS of 658.50 yen, up 0.9%.
The company distributes a twice-yearly dividend and it raised its planned annual dividend this year to 230 yen, with its payout ratio a conservative 31%. It also carries little debt with a debt-to-EBITDA ratio of 0.35.
Ticker?
P/E?
Dividend Yield
OTC: EBCOY
17.44
0.72%
5. Booking Holdings – Will the Stock Split This Year?
While analysts have discussed Booking Holdings as one of the most likely stock splits, the company itself hasn’t said whether that will happen. It has only had one prior stock split, and that was a reverse split when it was struggling at around $1 a share in 2003 when it was called Priceline.
Bookings has come a long way since then. In the first quarter, the company saw revenue rise 17% year over year to $4.4 billion. EPS was $22.37, increasing 220% from same period last year. Travel demand, for business and leisure, has picked up considerably since the pandemic.
Glenn Fogel, the chief executive, was non-committal when asked on a Barron’s podcast in January about a stock split, even though that would allow the company to give its employees more stock.
“I’m not saying that we shouldn’t, because what does matter is what do the shareholders want? I’m not saying we’d never do it. Maybe we would.”?
Ticker?
P/E?
Dividend Yield
NASDAQ: BKNG
28.33
0.93%
This chart, with information from Stock Analysis, shows that stock splits have increased in recent years, though 2024 is shaping up to be a quieter year than 2023.
How Can Splitting Affect a Stock’s Price?
In the short term, it has a direct impact as a forward stock split decreases a stock’s price and a reverse split increases it.
Investors may view a lower stock price as more attractive, even though the total value of their holdings remains the same and that can give the stock a short-term boost.
Splits can also cause the stock to become more volatile, at least in the short-term post split, as investors adjust to the new share price and trading dynamics. A company with sound fundamentals is likely to see a sustained price increase after a split, but a poorly performing stock may not see a long-term positive impact on its share price from a forward split.
Poorly performing companies that do a reverse split often see their stock ultimately fall back, unless management uses the breathing space to improve fundamentals.
Conclusion
A forward stock split, though usually a positive sign, isn’t enough reason alone to buy a stock. It’s mainly a cosmetic move, not making a difference in the company’s overall market value. However, with well-performing companies, it can be assumed that interest in a company will rise if its share price is trimmed during a stock split.
Reverse stock splits should put up all kinds of red flags to investors, because they are often desperate moves to keep a company from being delisted from an exchange.
Ultimately, if, after doing your research, you like a company that is considering a forward stock split, it may make sense to buy the stock before the split as it could give it at least a short-term boost.
References
https://ir.chipotle.com/2024-04-24-CHIPOTLE-ANNOUNCES-FIRST-QUARTER-2024-RESULTS
https://s3.amazonaws.com/b2icontent.irpass.cc/1735/rl133657.pdf
https://www.ebara.co.jp/en/ir/library/earnings/earnings/__icsFiles/afieldfile/2024/05/14/160q1_e.pdf
https://s201.q4cdn.com/865305287/files/doc_financials/2024/q1/BKNG-Q1-2024-Earnings-Release.pdf
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Jim Halley
EditorI am an experienced journalist who has also worked as an editor and writer at the Savannah Morning News, Salt Lake Tribune, USA Today, Stars and Stripes, and The Motley Fool. I spent the first half of my career in sports journalism, but in recent years have switched to writing about my other passion, stocks, particularly healthcare, real estate and consumer staples stocks. I've won numerous journalism awards from the Associated Press and state press associations and have been a judge for the Georgia Sportswriters Association. I've written one non-fiction book, Just One More Time, about Georgia Southern football, and…
