Plans for second stock split drive up Tesla shares

Tesla has joined a recent bout of tech companies, such as Alphabet and Amazon, in announcing stock splits to increase liquidity. Like its peers, the announcement sparked a rally in shares of the electric vehicle maker, despite it being the company’s second stock split in less than two years. 

Electric vehicle (EV) giant Tesla [TSLA] has outlined plans in a US Securities and Exchange Commission (SEC) filing for a stock split sometime later this year, with the aim of raising capital to pay a dividend to shareholders.      

In a filling that was released on 28 March, the group said that it plans to get shareholder approval at its 2022 annual meeting of stockholders “for an increase in the number of authorised shares of common stock… to enable a stock split in the form of a stock dividend”. The date and location of the annual meeting is not yet known, but according to the Teslarati website it is typically held in June or, at the latest, October.

Shareholders were quick to give their early approval. The announcement sparked a more than 8% rise in the Tesla share price, which helped the stock end the first quarter of 2022 in the green with a 1.9% gain.

What is a stock split?

A stock split, according to Investopedia, is when a company seeks to increase the number of its outstanding shares to boost its liquidity. The most common split ratios are 2-for-1 or 3-for-1, which means that the shareholder gets two or three shares after the split takes place for every share they held before. The total value of the shares remains the same as the split does not change the company’s valuation.

The last time Tesla split its stock was in August 2020. The stock’s 5-for-1 split, which took effect on 31 August last year, led to an 80% hike in the stock price between the announcement of the move and the split itself. Although, as previously reported in Opto, the group also experienced a subsequent 33% drop the week after.

“Tesla is the third mega-cap to signal such a move [stock split] this year and predictably gave the stock a nice pop,” Danni Hewson, AJ Bell financial analyst, said. “Stocks like Tesla and Amazon [AMZN] have grown out of reach for most retail investors, and such a split creates opportunities for more people to get a piece of the action while rewarding existing shareholders.

“The move also generates excitement, creates a buzz around the company, but also just the practise of investing. Glitz and glamour are no substitute for a nice set of figures, but they do make headlines.”

Tech stock splits trigger rally

Earlier in March, Amazon’s board approved a 20-for-1 stock split, which still requires shareholder backing at its annual meeting scheduled for 25 May. Trading is then expected to begin on a split-adjusted basis on 6 June. In addition, Amazon also decided to repurchase up to £10bn of stock. The Amazon share price rose 5% the day after the announcement.

According to CNBC, it was Amazon’s first split since 1999 and the fourth since its IPO in 1997. The basis for the split seems to have been improving employer/employee relationships. “This split would give our employees more flexibility in how they manage their equity in Amazon and make the share price more accessible for people looking to invest in the company,” an Amazon spokesperson said, as reported by CNBC.

Jefferies analyst Brent Thill had been more excited by the buy-back announcement, telling CNBC that it could show that Amazon had “gone back into more harvest mode than invest mode”. Thill said the split wouldn’t lead to any dramatic changes apart from “letting others buy in who want a piece of this at a more reasonable price”.

The other major stock split announcement was Alphabet [GOOGL], which announced a 20-for-1 split on 1 February this year. CFO Ruth Porat told CNBC that it came off the back of “hearing feedback that the stock should be more accessible for investors”. Alphabet’s share price jumped 1.6% on the announcement.

Investors show mixed reaction to stock splits

It’s not just tech stocks jumping on the stock split bandwagon. Video games retailer GameStop [GME] is also planning its first stock split in 15 years. The company plans to increase its share count to 1 billion from 300 million to implement the split in the form of a dividend.

GameStop had said that the raised capital from the stock split would be used to “provide flexibility for future corporate needs”. While the stock initially surged more than 10% after the announcement on 1 April, it pulled back to end the trading session down 1%.

For Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, a stock split is just a sentiment effect for investors. “Retail investors perceive price differently,” she said.