HQ TrustSeptember 4 2020

HQ Trust Chart of the Week: “Stock splits: first up, then down”

2 mins read

Written by Maximilian Kunz, Partner, Portfolio Management at HQ Trust

Most recently, with Apple and Tesla, two prominent US companies have announced a stock split aimed at making their higher share price optically more attractive. Analyst Maximilian Kunz from HQ Trust looks at the question of whether splits of this kind are beneficial for investors.

Click here to view the chart of the week either in German or in English.

In his investigation, the Senior Analyst set out to determine whether stock splits of this kind positively affect share performance. In the interests of thoroughness, Maximilian Kunz looked at a total of just under 7500 stock splits carried out since 1981. This figure included both normal stock splits and reverse stock splits. In his analysis, he calculated the relative development of a share as compared to the average of all shares from the same country for the period from one year prior to the stock split to one year thereafter.

  • “One particularly interesting finding is that the stock split marks the zenith of the relative performance.”
  • “Granted, shares can, on average, generate a significant outperformance in the period between the announcement and the split itself. But, following the event, a phase of relatively systematic underperformance begins.”
  • “On average, shares which had been subjected to a reverse split were not capable of shoring up their future performance nor could the companies which had decided on a normal split sustain outperformance.”
  • “Overall, only 34% of the shares subjected to a normal stock split outperformed the comparative share in the year following the split. In the case of reverse splits, this figure runs at 36%.“
  • “The analysis revealed regional differences: While US companies displayed the lowest rate of outperformance in the period prior to the split, underperformance in the year following the split was most pronounced there.”
  • “Investors should not overlook the fact that a stock split does not change the fundamental features of the company or the share.”
  • “Therefore, investors should not let themselves be dazzled by a stock split but rather should continue to base their decisions on the fundamental properties of a share and the growth expectations for the company.”

The universe under consideration comprises all shares listed in the MSCI AC World Index at any time since 1998. Excluded from the analysis were shares quoted under a price of US$ 2 at the time of the split. In order to permit reliable comparison of data for shares from a total of 21 developed countries, the relative performance was determined against an equal-weighted benchmark from all shares in the country in the period in question. As a result of this approach, the comparable market displays a small cap bias. This means that shares with lower levels of market capitalisation affect the development of the market more significantly than in a conventional benchmark which is weighted according to its market capitalisation.

Please note:
Investment in the capital market is associated with risks and, in extreme cases, can lead to the loss of the entire capital sum invested. Past performance is not a guide to future performance. Nor do prognoses have reliable validity for future performance. The graph does not constitute investment, legal or tax advice.