Stock Splits Are Meaningless

Without Dividend Increases Or Expected Growth

Today is a very important day. Eighty years ago the Allied forces invaded Europe and secured our future. Memorial Day takes into consideration the souls we’ve lost in all of our battles but today, eighty years ago, we fought a war and many perished.

D-Day, June 6, 1944, was a pivotal event in World War II when Allied forces launched a massive invasion on the beaches of Normandy, France. This operation, code-named Operation Overlord, marked the beginning of the end for Nazi Germany.

Led by General Dwight D. Eisenhower, more than 156,000 troops from all of the Allied nations participated. The invasion involved extensive planning and deception tactics to mislead the Germans about the landing site. The landings occurred on five beaches: Utah, Omaha, Gold, Juno, and Sword.

Despite facing strong German defenses, the Allies secured a foothold, allowing them to establish a beachhead. The success of D-Day led directly to the liberation of Paris and ultimately contributed to the Allied victory in Europe in May 1945. Pearl Harbor lives in infamy. So does D-Day.

Stock Splits Are Meaningless

Stock splits are often considered "meaningless" from a fundamental value perspective. They do not alter the intrinsic value of a company. A stock split increases the number of shares outstanding while proportionally reducing the price per share. This leaves the company's overall market capitalization unchanged.

Stock splits do not affect a company's earnings or revenue. Earnings per share will decrease proportionally with the split, but since the number of shares increases, the total earnings are unaffected. The “underlying” business operations remain the same. While a stock split might create a short-term perception of increased affordability due to the lower share price, it does not make the stock inherently cheaper. The value each share represents remains the same.

Although stock splits increase the number of shares and potentially improve liquidity by making the shares more affordable to a broader range of investors, in highly liquid markets, this effect is often minimal. The main impact is psychological. Investors may perceive the stock as more accessible. This perception drives demand and influences stock price in the short term, but it doesn't reflect a change in the company's value.

Empirical studies and historical data have shown that stock splits do not significantly affect the long-term performance of the stock. The temporary increase in stock price following a split is often attributed to the psychological effect and increased trading activity rather than a “fundamental” improvement in the company's financial health. While splits can influence market perceptions and potentially attract new investors by making shares appear more affordable, they do not affect the fundamental value of a company. Fundamentally, stock splits are considered meaningless.

Dividends & Fundamentals Matter

When a company announces a stock split, the “fundamental” aspects that truly matter are its dividends and earnings growth. A split does not alter the total dividends paid by the company, but it does change the dividend per share. For instance, in a 2-for-1 split, the dividend is halved because the number of shares has doubled. Sustainable and growing dividends are a sign of a company’s strong financial health and future profitability. With a stock split, the company’s ability to generate cash and distribute it as dividends is unaffected.

Post-split, the EPS will be adjusted based on the split ratio. While the earnings figure changes, the company’s total earnings do not. What remains critical is the company’s ability to grow these earnings over time. Investors are generally more concerned with the future earnings potential of a company. Companies that “demonstrate” earnings growth often experience an increase in stock price over time, as this growth translates into higher future cash flows.

Companies typically execute stock splits when their share prices are relatively high, indicating strong performance and positive market sentiment. This can be seen as a sign of management’s confidence in the company’s prospects. By reducing the share price, a company can make its stock more affordable to a broader range of investors, potentially increasing liquidity and marketability. However, the fundamental drivers of long-term value, earnings growth, and dividends, remain the key focus for serious investors.

While a stock split may attract short-term attention and potentially increase trading activity, the dividends and earnings growth ultimately determine a company’s value. Investors focus on these fundamental factors to assess a company's true potential and health, rather than the superficial changes brought about by a stock split.

Nvidia has roared about 25%+ higher since announcing its 10-1 stock split. Investors have flocked to the stock, led by the “herd” but its day of reckoning is upon us. What’s going to “happen next” is what you should keep your ears and eyes open to. There is a lot to learn from events of this nature so stay tuned and watch.

Eighty years ago, the Allied forces invaded Normandy to preserve all of the freedoms we enjoy today. Make no mistake about it, this was a battle to end tyranny. While it is easy for most to remember this day ceremonially, those who dig deeper will stand and salute the brave souls who gave their lives to protect ours. Take a few minutes of your time today to remember these brave soldiers. Say a solemn prayer for their memories and above all, never forget.