- Alphabet's upcoming 20-for-1 stock split could entice others to do the same, according to Bank of America.
- The bank found that stock splits are historically bullish for the companies that enact them.
- S&P 500 companies with share prices above $500 represent 17% of the indexes market cap.
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Alphabet's upcoming 20-for-1 stock split could entice others to do the same and spark a wave of inflows into the mega-cap tech giants that retail investors have shunned due to high stock prices, according to Bank of America.
"Bring FAAMG [Facebook, Amazon, Apple, Microsoft, Google] to the people," BofA said in a Tuesday note.
The bank found that historically, stock splits are bullish for the companies that enact them, with average returns one year later of 25% compared to just 9% for the S&P 500. The outperformance in companies that split their stock was also seen in the three-month and six-months periods afterward.
In recent years, stock splits have led to returns that were more subdued than the historical 25%, but nonetheless they still trounced the broader market. Examples include Tesla, Nvidia, and Apple, which have all surged since their respective splits.
While stock splits have no fundamental impact on the underlying business, BofA chalked the outperformance to momentum, in both the business and the stock price. Companies that enact stock splits are doing so because their stock price is on the rise, and "underlying strength in the company is a primary driver of elevated prices," the bank said.
"Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy," BofA said.
And that momentum could be contagious to other companies that have high stock prices and haven't enacted a stock split. According to BofA, S&P 500 stocks with share prices above $500 represent $6.6 trillion in market value, or about 17% of the index. Much of those stocks are found in the consumer discretionary and information technology sectors.
Some companies with stock prices above $500 that could enact a stock split include Amazon, AutoZone, Booking Holdings, and Chipotle, among others.
"Google's recent 20-for-1 announcement may attract attention from other companies and spark a wave, drawing more investor flows into the market," BofA explained. Those fresh inflows could provide support for the market if other companies follow Alphabet's lead, particularly in growth-oriented stocks that have been hit hard in recent months.