Stock Split Watch: Is Broadcom Next?
Stock splits can make high-priced shares more accessible to ordinary investors. Accounting experts and textbooks call it a "neutral event." It has no real effect on the stock's total market value or the value of shares in your portfolio.
Yet there's psychological value in a comfortably priced stock ticker, and auto-trading computer algorithms may execute trades based on specific prices and daily trading volumes.
So most companies with dramatic stock-price growth tend to perform stock splits from time to time. The exceptions to this rule end up with astronomical share prices over time.
Take Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), for example. In the most famous example of high-performance stocks without stock splits, the original Class A shares have been beating the market since the mid-1960s without spectacular changes to the share count. Today, the insurance-based conglomerate trades at $547,000 per share.
That's a bit more than the average consumer-sized wallet can handle. Berkshire issued a Class B stock in 1996, which danced the stock-split polka with a 50-for-1 split in 2010. Those shares can now be had for $358 a share.
Without the fairly recent split, even the low-cost alternative would command a princely sum of $17,900 per share in the summer of 2023. Both stock classes offer nearly identical returns over time.
So let's take a look at one of the highest-priced stocks in the surging stock market of 2023. Semiconductor giant Broadcom (NASDAQ: AVGO) has seen share prices rise 52% year to date and 161% in three years.
The old Broadcom stock did split three times between 1999 and 2006. But Avago, which acquired Broadcom and adopted the name in 2015, has never taken the stock-split route. As a result, one Broadcom share costs $850 right now. That's uncomfortably close to $1,000 -- a level few stocks in history ever achieved.
Should Broadcom issue a stock split in 2023? Here's what I think.
The factors and history behind stock splits
There's no magic number that would automatically trigger a stock split for every stock. In recent memory, energy drink brewer Monster Beverage issued a 2-for-1 split when the pre-split share price stood just below $100. Amazon's 20-for-1 split last summer, on the other hand, dropped share prices from $2,500 to $125.
Broadcom never announced a split before. Hence, there's no established history of split-inducing price levels. Furthermore, the topic of stock splits never comes up in Broadcom's earnings calls or investor conferences.
I checked every transcript I could find from the last three years and Broadcom management's use of the word "split" was largely limited to how its revenues are split between different client classes. It never showed up in the context of stock splits.
This stock could very well reach $1,000 per share and just keep on trucking. There is no rule, regulation, management promise, or tradition forcing the company to make a move.
That said, Broadcom could post a stock split without signaling its intentions beforehand. A 10-for-1 split would drop the share price to less than $100, assuming the stock doesn't go on a wild run before the adjustment takes effect.
The company would have to run this idea past a shareholder vote first, asking the owners to approve a dramatically larger number of authorized shares. This year's annual shareholder meeting was held in April, so there would have to be a special meeting for the purpose of tallying the vote.
That's just extra paperwork, though. I see no reason why the stockholder base would reject that proposal.
What about Broadcom's shareholder-friendly strategy?
Broadcom's board of directors (who would announce and manage the stock-split process) could soon seek a stock split, but there's no overwhelming reason to do so. Ultimately, the decision comes down to whether the company wants to encourage smaller investors to get more engaged with this stock.
On that note, I'm actually surprised by Broadcom's non-existent stock split history. Shareholder-friendly moves are right up this company's alley.
Over the last four quarters, Broadcom generated $17.1 billion of free cash flow. From that rich vein of cash profits, the company sent out dividend checks worth $7.4 billion while buying back shares to the tune of $6.9 billion. That's 83% of an impressive cash flow going right back into investors' pockets.
It doesn't make a big difference whether Broadcom splits its stock or not. The move itself shouldn't move Broadcom's adjusted share price or the total market value in the long run.
Still, I sort of expect such a shareholder-friendly business to keep the skyrocketing stock affordable to the common stock buyer. So I won't hold my breath waiting, but it's entirely possible that Broadcom could announce the preliminary steps toward a stock split at any moment.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Berkshire Hathaway, and Monster Beverage. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
