Many investors may have missed the rise Broadcom (NASDAQ:AVGO). As a business-to-business chip and software designer, it may have escaped the attention of many consumer-oriented investors.
Nevertheless, amid a nominal stock price of about $1,700 per share, Broadcom has finally offered its first stock split (not counting the splits before the old Broadcom was taken by the current company once known as Avago). This will take place on July 12. But now that the stock is being split, investors must ask themselves whether the split ultimately matters to them.
Broadcom’s stock split
On the surface, some Broadcom shareholders and observers might assume it matters a lot. The stock rose 12% in the trading session after the announcement, boosting its popularity, at least temporarily.
However, in an official sense, the split changes nothing. If someone now owns 10 shares worth $1,700 each, after the split they will own 100 shares worth $170 each. Furthermore, instead of receiving $21 in dividends per share on 10 shares, they will earn $2.10 on each of their 100 shares.
Furthermore, the company is not required to initiate a stock split. With a market cap of approximately $775 billion, Broadcom is unlikely to be a candidate for participation in the price-weighted market Dow Jones Industrial Averagewhich puts enormous pressure on components to split shares when nominal prices rise too high.
Furthermore, the stock has risen more than 110 times since its initial public offering (IPO) in 2009. This makes it the eighth most expensive stock trading in the US markets today, and such a track record could strengthen the case for maintaining a high nominal share price strengthen.
How the split could help Broadcom
Still, the stock split could help Broadcom’s stock at the margins. At a lower nominal price, retail investors are more likely to take a stake in the company.
Furthermore, Broadcom’s stock will likely continue to rise thanks to artificial intelligence (AI). Its original business segment, semiconductor services, specializes in application-specific integrated circuits (ASICs). Morgan Stanley believes such chips could account for 30% of the AI chip market by 2027.
In addition, Broadcom operates an infrastructure software segment that is strengthened 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 gain insights that organizations can act on and improve digital experiences for end users.
Without a stock split, these AI and technology innovations would eventually increase the stock price to the point where liquidity is squeezed, making individual stocks harder to buy and sell. With Broadcom soon to launch ten times as many shares, the company is sidestepping this potential problem.
Understand the stock split
Broadcom’s stock split is, on balance, positive for its shareholders and potential investors. The demerger does not change anything in an official sense, as the current shareholders retain an equal interest in the company.
However, the lower share price makes it attractive to more buyers, especially retail investors. Additionally, a lower share price should lead to greater liquidity, meaning investors can more easily buy or sell shares closer to the going share price.
As Broadcom capitalizes on its technology and AI-driven growth, more shareholders will likely ultimately benefit.
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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 splits its stock. But does it matter? was originally published by The Motley Fool
