Many investors may have missed the rise of Broadcom (NASDAQ: AVGO). As a business-to-business chip and software designer, it may have escaped the notice of many consumer-oriented investors.
Nonetheless, amid a nominal stock price of approximately $1,700 per share, Broadcom has finally offered its first stock split (not counting the splits before the old Broadcom was bought by the current company once known as Avago). This will take place on July 12. But as the shares split, investors should ask whether the split ultimately matters to them.
The Broadcom stock split
On the surface, some Broadcom shareholders and observers may assume it matters a lot. The stock rose 12% in the trading session following the announcement, which boosted its popularity, at least temporarily.
However, in an official sense, the split changes nothing. If one owns 10 shares worth $1,700 each now, they will own 100 shares at $170 each post-split. Also, instead of collecting $21 in dividends per share on 10 shares, they will earn $2.10 on each of their 100 shares.
Additionally, the company is under no obligation to initiate a stock split. At a market cap of around $775 billion, Broadcom is likely not a candidate to join the price-weighted Dow Jones Industrial Average, which places tremendous pressure on components to split shares when nominal prices rise too high.
Furthermore, the stock is up more than 110-fold since its 2009 initial public offering (IPO). This makes it the eighth priciest stock trading on U.S. markets today, and such a track record of success could bolster the case for maintaining a high nominal share price.
How the split could help Broadcom
Nonetheless, splitting the stock could help Broadcom stock on the margins. At a lower nominal price, small investors are more likely to take an interest in the company.
Also, Broadcom stock is likely to continue moving higher thanks to artificial intelligence (AI). Its original business segment, semiconductor services, specializes in application-specific integrated circuits (ASICs). Morgan Stanley believes such chips could make up 30% of the AI chip market by 2027.
Additionally, Broadcom operates an infrastructure software segment bolstered by the recent acquisition of VMWare. There, it has developed an AIOps program. Through AI and machine learning, it applies data science and automation to derive insights organizations can act upon and improve digital experiences for end users.
Without a stock split, these AI and technology innovations would eventually raise the stock price to the point that liquidity starts getting squeezed, making individual shares more difficult to buy and sell. With Broadcom soon to float 10 times as many shares, the company sidesteps this potential issue.
Making sense of the stock split
Broadcom’s stock split is a net positive for its shareholders and prospective investors. Indeed, the split changes nothing in an official sense since it leaves current shareholders holding an equivalent stake in the company.
However, the lower stock price makes it attractive to more buyers, particularly small investors. Also, a lower stock price should lead to greater liquidity, meaning investors can more easily buy or sell shares closer to the stock’s prevailing price.
Ultimately, as Broadcom capitalizes on its tech and AI-driven growth, more shareholders are likely to benefit as a result.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Finally, Broadcom Is Splitting Its Stock. But Does It Matter? was originally published by The Motley Fool
