By Paul R. La Monica
Stock splits are a hot trend on Wall Street this year, but some companies are splitting their shares to boost -- not cut -- their stock prices.
Virgin Galactic, the unprofitable space tourism company, did what is known as a reverse stock split that took effect on Monday. It reduced the number of total shares outstanding to push the price higher.
Shares of Virgin Galactic were trading for less than 70 cents on Friday. But following a 1-for-20 split, which cut the number of shares outstanding by a factor of 20, the price shot up to more than $11.50 Monday.
Why would a company do this? Mainly to push the stock price higher so it continues to meet minimum requirements (typically at least $1 for 30 consecutive trading days) to remain listed on stock exchanges such as the NYSE and Nasdaq.
Textbook seller Barnes & Noble Education, which is also losing money, just did the same thing last week. It conducted a 1-for-100 reverse split that catapulted its stock price from under 10 cents a share back up to around $8 on Monday.
This is, of course, the opposite problem faced by more successful companies that have done normal, or forward, stock splits.
Walmart and Nvidia recently split their stocks, lowering their share prices in the process to lure more investors. Chipotle and Broadcom also have announced plans to conduct big stock splits, moves that will eventually push their prices from the quadruple digits to around $67 for Chipotle and $180 for Broadcom.
In a typical stock split, a company issues more shares at a lower price. Take Nvidia for example. Investors who owned one share trading around $1,209 before the split wound up with 10 after the split worth around $120.90 apiece. Nvidia's market valuation didn't change but the split may make shares more affordable to retail investors.
Companies that split their stocks to lower the price often wind up benefiting from strong demand. Walmart shares are up more than 25% this year. Nvidia stock is up 164%, hitting record highs since its split took effect June 10. The S&P 500 is up 14% this year.
Unfortunately, reverse splitters often don't benefit from a higher share price.
Virgin Galactic's stock tumbled more than 15% Monday after the reverse split went into effect. It has lost nearly a third of its value since announcing the split on June 12.
Barnes & Noble Education has to dropped, too, falling more than 10% since its reverse split was conducted last week.
Investors seem to realize companies that need a reverse split to remain listed on a stock exchange clearly have poor fundamentals and little support from Wall Street in the first place. An artificially higher stock price doesn't change that.
Write to Paul R. La Monica at paul.lamonica@barrons.com
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(END) Dow Jones Newswires
June 17, 2024 13:05 ET (17:05 GMT)
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