TSLA Stock Split Analysis
Power here and today we were talking about some breaking news on Tesla's stock investor relations team in the after our session today announced the tussle redoing a five for one split on Tesla's stock in the after hours session right now as I'm recording tesla is trading up about six percents on the news after finishing the day down three percent the statement and full from Tesla reads quote Tesla Inc announced today that the board of. Directors has approved and declared a five or one split of Tesla common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors each tackler of record on August, Twenty First Twenty twenty will receive dividend of four additional shares of common stock for each then held share to be distributed after close of trading on August twenty, eighth twenty, twenty trading will begin on a stock split adjusted basis on. August thirty, first twenty, twenty and quote. So if you're not familiar with the stock split, pretty simple concept basically for every share of Tesla that someone owns they will be granted for additional shares meaning they would then own five at the same time. The stock press will then be reduced to one fifth of the press that it is trading at at that time meaning there is no change to the valuation or the Market Cap. Of the company. So for Tesla, happen after the close of trading on Friday August twenty eighth and then on Monday, the trading will start at the new lower price with the additional share count factored in. So if Tesla Trading Fifteen, hundred dollars per share at the end of the day on that Friday new of one share on Monday, you'll have five shares each at three hundred dollars a piece I'm sure people have similar questions about. Contracts as well because this is a five for one split and not something a little bit weird like a three for two or something like that I'll options contracts will be adjusted in pretty much the exact same way. So if you had one contract for buying Tesla fifteen hundred dollars per share, for example, that will just become five contracts for buying Tesla at three hundred dollars per share say meth. So let's talk about the. Pros and cons of stock split. Obviously, there's no actual change to the company in terms of valuation. This is really just an accounting thing but the biggest pro is obviously that the stock price becomes more affordable to potentially new investors or even to investors that maybe just want to add one or two shares every month and can't afford to do that. If the stock price is about a thousand dollars over time, this benefit has become. Less significant with the advent of fractional share trading a lot of different brokerages are offering that now. So before you could about a fifth of a share of Tesla for three hundred dollars that's often presented as making stock split irrelevant. But that's not a perfect solution. They're voting rights issues with that. You don't have a right to vote if you only own a fifth of a share generally obviously, that's not gonNA, make a difference and. Some services do correct for that, but it is still a problem more importantly though not all brokerages offer fractional share trading especially internationally, which means by default there are some investors that don't have access to the number of shares that they would like to buy the logic and follows that if you do a stock, split your opening up the possible investment to more investors, that is what Tesla supplies as the reason here they say to. Make stock ownership more accessible to employees and investors. That's what stock split does. Even for those brokerages that do offer fractional share trading there are often limitations on those. For example, some don't let you do limit orders only allowing market orders for fractional shares. So I think that's the biggest one and there are knock on effects to that. If someone is able to by Tesla stock, probably more likely to follow a company more closely. And perhaps eventually become a customer whether that's something as simple as merchandise eventually vehicle and I think they're also much more likely to talk to their network about the company and about their products. So I think those secondary impacts are pretty important as well and can actually help with the fundamentals of the business. There is also some research that shows that stocks that undergo stock splits then up outperforming one study that tracked the performance of. One Thousand Two hundred seventy five companies that underwent a two for one stock split between nineteen seventy five and nineteen ninety found that those stocks outperformed the control group by eight percent in the first year and sixteen percent over three years a similar study from nineteen ninety to nineteen ninety-seven using companies that did a two for one three for one or four four one stock split found similar results eight percent over performance in one. Year and twelve percent over three years obviously though does not equal causation. It seems more likely to me at least that companies that have done well, and that project continued doing well in terms of the share price performance are more likely to do a stock split than those that have not but taking that a step further that means that a stock split is essentially a sign of competence essentially management believes that the share price is. Unlikely to fall significantly or there would be no incentive to do stock split, and perhaps they continue to believe that the stock price will rise creating more of an incentive to stock split companies don't want their share prices to get too low and certainly they don't want them to be lower than they IPO tat for example, for similarly psychological reasons it then just starts to look like your stock is actually underperformed. So if you. Do a stock, split your expressing confidence that that's not going to happen and I think that adds a nice little psychological benefit to the announcements of stock splits and probably plays a pretty big role in why we see stock prices jump on the days that stock splits are announced.