Stock splits and reverse stock splits change a firm’s share price and the number of existing shares. Investors need not be concerned about their positions since they remain the same, but splits can still indicate company health.
Stock Splits and Reverse Splits
Stock splits are corporate actions that increase a firm’s outstanding shares to decrease the share price by the same factor. A $100 stock with 1,000 shares that does a 2:1 split, called a “2-for-1,” will be worth $50 per share out of 2,000 shares. Stock splits tend to improve company liquidity and attract smaller investors, increasing demand. Because of this, most investors often view splits as positive signs of growth in the company.
Similarly, reverse stock splits are the opposite of stock splits. They decrease a firm’s number of shares to raise the share price. A $100 stock with 1,000 shares that does a 1:2 reverse split, called a “1-for-2,” will be worth $200 per share out of 500 shares.
Spinoffs
At times, the company’s stock is not the only thing that splits. A spinoff is when a company distributes shares to ultimately split into another company. For example, after GE announced a 1:8 reverse split in July 2021, it later revealed that by early 2024 it would divide into three independent companies — GE HealthCare, GE Vernova for energy, and GE Aerospace as the largest. Each new firm’s stock price will be determined during spinoffs. The spinoff for GE HealthCare will be on January 4, 2023, and the two remaining spinoff dates have not been announced thus far.
In November 2021, Johnson & Johnson announced a spinoff for consumer health called Kenvue. JNJ will remain in the pharmaceutical and medical device business. Kenvue’s spinoff is forecast to conclude in November 2023, when current shareholders in JNJ will also own shares in Kenvue. Further, Becton Dickinson and Co completed an independent diabetes care spinoff called Embecta Corp earlier this year. BDX gave its shareholders shares in EMBC worth one-fifth of their BDX shares as of the close on March 22.
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This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.