Tesla announces 5 for 1 stock split

  • Tesla announces 5 for 1 stock split
  • Split takes effect August 21
  • TSLA shares up 228% YTD

Tesla has announced a five-for-one stock split "to make stock ownership more accessible to employees and investors." Each shareholder as of August 21 will receive a stock dividend of four additional shares. This is like a cash dividend but in the form of stock, and it dilutes the lofty share price while the market cap and fundamentals remain the same. Starting August 31, trading will be done on a stock split-adjusted basis. 

The split means more retail investors can purchase Tesla stock, which closed at $1,374.39 yesterday and has more than tripled in value this year (+228% YTD). Buying a part of a share is easier than it used to be as online brokers offer fractional trading. CEO Elon Musk's hefty stock awards are also safe because they are tied to revenue, profitability and market cap goals, not the price of individual shares. Experts say stock splits usually cause volatility to increase. Apple announced its fifth stock split last month.

YCharts
YCharts.

TSLA shares are up over 6% in pre-market trading as some investors see the announcement as a bullish sign, which is puzzling to many others who view the split as a largely cosmetic change with some psychological impact. Market reactions to splits remain a bit of a mystery, and there are even research papers looking into them. Nasdaq's chief economist Phil Mackintosh looked at research and large cap stock splits from 2012 to 2018 and proposed that stock splits boost valuations (see chart below), lower trading costs and companies’ capital costs, and maximize wealth for employees and others.

Stocks doing splits outperform the market, typically as early as the announcement of a split, says Nasdaq Economic Research

stock splits
Source: Nasdaq Economic Research.