What by the Numbers America Can Expect with a Stock Split
When it comes to a company split, details can and do indeed get complicated. For the layperson on the outside looking in, stock splits may seem confusing, complicated, and even unnecessary. But there is a basis behind changes made to a company’s stock, whether through a split or a dividend payout, and a purpose to every move. When it comes to a stock split for America’s darling Johnson & Johnson (JNJ) stock, it is important to be aware of what to expect come announcement time.
The most current public news of a possible split came from JNJ in October 2020 when, in the company’s earnings call – where they post the latest financial information, market share, and more – Ed Frahan, Chief Financial Officer, stated that he and the rest of the leadership at JNJ are monitoring their split “candidacy” and that the company will eventually decide whether or not to move forward with a potential split or keep the split of the same.
While Frahan stated that the company has not yet made any decisions – pending what company numbers and figures show before they reconvene – it is important to understand how a split would affect JNJ’s numbers, including their stock trading price. The most common number of splits that a stock may go through is two (2:1) or three (3:1) times, meaning that in a 2:1 split, someone who owns one stock would be given two.
It should also be noted that during a company split, the value of each individual stock does not increase but is instead cut in half or a third. So, for a 2:1 split for JNJ stock, if a share is worth $100, after the split, each individual stock will be worth $50 a piece.
What to Expect When JNJ Splits
When it comes to JNJ stock and a hypothetical split, there a few things to expect.
Firstly, a split from JNJ would make the stock accessible to almost all financial arenas; those who have been scared away by the high price will no longer have an excuse to remain shy away from buying JNJ stock.
Furthermore, a split would allow JNJ stock to compete with other similar stocks in the same price range. This means that if a stock such as JNJ splits down to $50 a piece, it would be competing with stocks such as the Coca-Cola Company (KO) and the Procter & Gamble Company (PG). Because the price brackets are now the same, the competition to remain on “top” in the market increases.
The other benefit to a split is that it allows a company such as JNJ to trade more shares at a lower price due to increased accessibility and liquidity. While the invested money does not increase, the number of shares that an investor may have increases, allowing more and more people to invest in JNJ stock.
However, the disadvantage to splits is that “pre-split” investors do not benefit from a company split financially, but the increase in cheaper stock does attract more investors and money.
Why JNJ might think Twice about a Split
While there are some benefits noted above to JNJ stock splitting, there is also the flip side. For instance, with a split, financiers view the decrease in price as a risk that translates to a decrease in value; since a stock such as JNJ has a higher trading price, it’s seen as a more secure stock. Thus, if the company were to split, they may be seen as a company taking a risk.
Furthermore, there is the issue of short-term investor trading. With a decrease in price, short-term investors may be more drawn to quick investments for minimal to no gain. Alternatively, JNJ does historically have a large population of long-term investors, who understand that active investing provides the biggest returns in the long run.
Lastly, with the bigger picture in mind, JNJ may push away some potential large buyers with a split, as their price per share would be so low that it would likely demean what they view as a highly valued stock.
When it comes to company decisions such as stock splits, expert opinion plays a major role in understanding not only the theory behind such decisions but also in deciphering the potential consequences of each potential move. Many financial analysts have shared their views on what JNJ’s announcement and a potential split could mean for the future of their stock.
John Block, a retail stock broker for thirty-nine years and Speaker of the House in the 1980s, believes that JNJ will stand to benefit from a split. “Long time JNJ investors,” he commented in a recent statement, “have been waiting for a move such as this for years. This will only work out in the company’s favor, as well as that of their faithful shareholders.”
Doreen Ciano, a commodities trader for Goldman Sachs, also offered her thoughts. “Given the current state of the market,” she noted, “and of many of America’s leading healthcare organizations, I believe that JNJ would spare no thought in making the split if it makes sense financially. This could be the potential cost-saving move that the company needs.”
What the Historical Record Can Tell Us
In addition to expert opinion and analysis, the history of JNJ stock can also provide some information on what could be expected should the company decide to go forward with a split.
History supports us with the idea that a split from JNJ would have a positive effect not only on liquidity but also on trading volume; the stats from their most recent split suggest that trading volume in their shares increased threefold for the following year.
For those looking for the exact numbers, in their 2017 split, the trading volume jumped from 11 million shares a day before the actual split to 38 million shares a day following the split. Furthermore, the amount of individuals investing in the stock seemed to only increase – from 30,000 investors before the split to over 50,000 after the split.
On the other hand, what can also be noted from the pre-2017 split record is that when it comes to JNJ stock price, not much changes; while their price per share may double or even triple, the stock’s value remains largely the same.
What History Can Teach Us Moving Forward
The potential stock split from JNJ may or may not show up in the near future. However, the historical record with JNJ stock is vast and can provide potential insight in what kind of effect a split could have on America’s darling powerhouse.
Not only could a split offer long-term investors an increase in stock and less of an issue with share price, but the historical numbers from 2017 – 2018 suggest that the liquidity of JNJ stock could increase exponentially. Further, with a massive increase in the number of investors buying into the stock, it is suggested that JNJ’s size, performance, and marketability could all increase.
That said, whether or not JNJ decide to move forward with a hypothetical split remains to be seen.
Concerns about Potential Volatility and Risk
When it comes to a stock split, much of that decision can be driven by the stock’s current volatility. If the stock continues to remain relatively volatile, JNJ may opt to not move forward with a split given that potential issues may arise with the stock having a number of investors, but trading volume still being relatively low.
Financial risk is also something to consider; while much research can be done to limit the number of risks associated with a stock and its resulting split, risk is something that needs to be taken into account when deciding whether or not to make a company split.
Finally, additional taxes may also come into play and must be taken into account when a potential split is on the table. The further cost to the investor and extra taxes taken due to a split may deter individuals from the stock, depending on the decision towards a split.
The Potential of a JNJ Split
When it comes to a potential split from JNJ, the statements from their CFO and the history of their stock market movements, it is apparent that a possible split is on the horizon – if the numbers make sense.
Both experts and long-term investors in JNJ agree that a split could work in favor of the stock, with increased trading volume and longer-term investors seeing their stock quadruple.
However, there are disadvantages to a split that must also be taken into consideration and planned for. Potential volatility and financial risks must be limited and accounted for, as well as taxes that could come into play, to remain in line with regulatory bodies and federal policies.
The Impact of JNJ’s Rival Companies’ Splits
When it comes to competing companies and their stock splits, the effect upon JNJ may differ.
For instance, if a competing company such as the Coca-Cola Company (KO) were to split their stock, the number of potential investors in JNJ could decrease as those with a limited budget may opt to turn to the stock now that it is more affordable to purchase.
On the other hand, price cuts on competitors ’ stocks come with increases in investors; that means that with the same amount of money, investors may be able to purchase a greater number of stocks, which results in increased trading volume and investment into JNJ stock – since those potential investors may opt to invest partially in the KO and partially in the JNJ to make the most of their budget.
What a JNJ Split Could Mean for Other Companies
While it may seem that JNJ’s decision to split its stock will only affect them on a financial level, the decision could have an even greater than expected effect.
If JNJ does choose to move forward with a stock split, it could create a chain reaction amongst a variety of other companies. Seen as a healthcare technology pioneer, JNJ has always been at the forefront of making decisions that will have an effect on their market.
No company wants to seem older and outdated, and the fact that JNJ could take this move proves to any competitor that they must also consider making changes within their own financial division. Ultimately, this could lead to more competition in the stock market and potentially more affordable stock prices across the board.
Connections to Other Industries
A potential stock split by JNJ could open a number of doors for other industries should the decision be made.
Foremost, the possibility of a stock split from JNJ could have a ripple effect on a variety of industries due to their symbolization in the stock market and their status as a powerhouse; for instance, a stock split may mean increased investment in the healthcare industry overall and an increased influx of money into a variety of other related industries.
Additionally, a potential split could bring more attention to stock trading in general. JNJ is a household name in many American arenas, and with the potential split, more and more individuals could potentially be enticed to the market.
Overall, with the potential to create a chain reaction, a split from JNJ could result in its own kind of financial revolution.
When it comes to predicting the