Microsoft and the Potential for a Stock Split
Stock splits, especially in the technology sector, have recently garnered increased attention. As companies like Nvidia and Broadcom saw their stock prices surge past the $1,000 mark, both opted for stock splits, potentially to attract more investors. In this context, it might surprise some investors that Microsoft (MSFT) could be next to consider this move. Despite a share price hovering around $420, the likelihood of a split is higher than many realize. Here’s the reasoning behind this assessment.
Microsoft’s History with Stock Splits
To understand the current situation, it’s helpful to examine Microsoft’s past. The company went public in 1986. Between 1987 and 2003, they executed nine stock splits. However, no splits have occurred since then. This pause makes sense, considering that Steve Ballmer was at the helm from 2000 to 2014. During that period, the stock declined by over 30%, making a split unnecessary. Since Satya Nadella took over as CEO, the stock has appreciated by roughly 1,000%, reaching a record high. Interestingly, this growth alone may not trigger a split.
As evidenced by Nvidia and Broadcom, both traded at significantly higher prices before their recent stock splits. Furthermore, with brokerages offering fractional shares, smaller investors can engage with stocks, even at higher nominal prices. In fact, compared to the highest-priced stocks trading today, Microsoft’s price barely ranks in the top 100, which does not necessarily prompt a split decision in today’s market.
Why a Split Could Be on the Horizon
The determining factor may stem from something often overlooked by investors: the Dow Jones Industrial Average (^DJI). Microsoft became one of the 30 stocks composing the index in 1999. This inclusion is a significant distinction and has undoubtedly benefited Microsoft. However, the Dow is a price-weighted index, meaning companies with higher nominal prices have a more significant influence.
Moreover, among the Dow’s 30 stocks, only Goldman Sachs and UnitedHealth Group trade at a higher price. This positioning makes Microsoft one of the more influential stocks. In addition, one of its key competitors, Apple, is also a Dow constituent. Apple likely faced similar pressure in 2020 when its stock traded around $450 per share pre-split, which is not far from Microsoft’s current nominal price.
Although Apple never explicitly cited the S&P Dow Jones Indices and its parent company, S&P Global, as a reason, they executed a 4-for-1 stock split in August 2020, taking their share price to just over $110 at the time. Any such pressure does not guarantee the specifics of Microsoft’s split decision. Its historic nine splits were either 2-for-1 or 3-for-2. This past performance holds predictive value but is not definitively predictive of future splits. Still, another 2-for-1 split would price it near many other Dow components.
Furthermore, it supports a $3.1 trillion market cap in a market that has never had a $4 trillion market cap stock. Market cap milestones tend to give way gradually, meaning such a move would likely appease S&P Dow Jones Indices for the foreseeable future.
Conclusion: Is Microsoft the Next Stock Split Candidate?
Ultimately, Microsoft will likely split this year, and pressure from the S&P Dow Jones Indices will probably tip the scales. Although investors have adjusted to higher nominal stock prices, only two of the stocks trading at a higher price are part of the Dow 30, a price-weighted index. Given the increased interest associated with being part of the Dow Jones Industrial Average, expect Microsoft’s board to take necessary steps to remain a component of the index.
