I happened to be looking at the list of companies whose stock split in November. Some investors, like Warren Buffett, don't believe in stock splits. Others think a lower stock price improves the marketability. There probably isn't a definitive answer. However, it got me thinking about a stock's one-year performance immediately following a split. Going back to November 2008 and 2009, I've taken five stocks from each year and looked at their one-year performance and in the case of 2008, the two-year performance. Let's see if it pays to invest in the stock-split portfolio.

IN PICTURES: Top 6 Most Tradable Currency Pairs

Stock Splits - March 2009 to September 2009

Company Stock-Split Date Split Amount One-Year Return
United Therapeutics (Nasdaq:UTHR) Sept 23/2009 2 for 1 6.6%
Abovenet (Nasdaq:ABVT) Sept 4/2009 2 for 1 15.2%
AmerisourceBergen (NYSE:ABC) Jun 16/2009 2 for 1 45.6%
GreenMountain Coffee Roasters (Nasdaq:GMCR) Jun 9/2009 3 for 2 7.7%
Myriad Genetics (Nasdaq:MYGN) Mar 26/2009 2 for 1 -61.8%
Average Return 6.8%

S&P 500 N/A N/A 14.9%

One-Year Returns
When comparing the S&P 500 with the average of the stock splits over a one-year period, the index clearly is the better performer. One possible reason for this result is that many investors likely bought one or more of these stocks after their split announcement but prior to the actual event, selling shortly thereafter once a profit was in-hand. That's a fine theory, but you'd think that the increased liquidity brought about by the split, along with a cheaper share price, would be enough to drive these stocks even higher. Some have even made the argument that stock splits aren't nearly as popular today because triple-digit stock prices like those at Apple (Nasdaq:AAPL) are a sign of corporate success. Who knows? But it's important to keep in mind that the difference between the index and the splitting-stocks wouldn't be nearly as great if the one major loss from each were removed from the average. In the case of the 2009 splits, the return jumps from 6.8 to 18.8%, and in the 2008 splits, it jumps from negative 4.2% to positive 6.1%. That's quite a difference and something to keep in mind as we look at the two-year returns.

Stock Splits - September 2008 to October 2008

Company Stock-Split Date Split Amount One-Year Return Two-Year Return
Buckle (NYSE:BKE) Oct 31/2008 3 for 2 26.7% 26.0%
Brown-Forman (NYSE:BF.B) Oct 28/2008 5 for 4 15.9% 46.4%
Graham Corp. (NYSE:GHM) Oct 7/2008 2 for 1 (15.4%) (13.3%)
Illumina (Nasdaq:ILMN) Sept 23/2008 2 for 1 (3.0%) 19.0%
Integral Systems (Nasdaq:ISYS) Sept 8/2008 2 for 1 (70.4%) (68.0%)
Average Return (4.2%) 16.2%

S&P 500 N/A N/A (1.3%) 9.7%

Two-Year Returns
Even with the 68% decline in Integral Systems' stock price over the last two years, the cumulative returns over a two-year period favor the stock splits by 650 basis points. While we will need to follow the 2009 splits through 2011 to determine if there's a pattern, I'm prepared to accept the preliminary hypothesis that stock splits do ultimately lead to higher performance long term. In May, Chinese search engine Baidu (Nasdaq:BIDU) split 10-for-1 and in the first two days following the split, its stock jumped approximately 10%. I don't have a crystal ball but I'm certain its stock will be trading much higher in May 2012.

Bottom Line
Personally, I never thought there was anything to stock splits but this small sample makes you wonder why there aren't more splits happening. (We explain what they are, the thinking behind them as well as their results. Check out Understanding Stock Splits.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!