2020 has actually been a fantastic year for Tesla (NASDAQ: TSLA) investors. The electric-auto maker’s stock rate started the year at $418 per share, and on Dec. 7, it fetched more than $625 per share. That would be pretty outstanding even if it weren’t for the 5-for-1 stock split that Tesla did at the end of August, which has actually given financiers in Tesla’s stock an approximately 650% gain year-to-date.
2020’s stock split came as a surprise for some Tesla shareholders, particularly offered CEO Elon Musk’s lack of interest in talking about the subject in the past. Yet now that Tesla has revealed that it can pull the trigger and divided its shares when the time is right, some financiers question if the business won’t do it again in 2021– particularly if there’s an incentive for it to do so.
Image source: Getty Images. What it required to make Tesla split its stock Long before it actually made the decision to split its shares, Tesla had had lots of events to consider a stock split. When the stock made its first encounter triple-digit share costs in 2013 and 2014 following the successful release of the Model S sedan, some believed that Tesla may follow the convention of doing a split then and there. Nevertheless, Tesla ended up joining what became a growing group of companies determined not to utilize the $100 per share mark as a signal for a split.
Tesla’s unadjusted share price stayed in a rough range of $200 to $400 or two throughout much of the second half of the 2010s. It wasn’t till February that the car manufacturer’s share rate flirted with the $1,000 per share mark, prompting some to believe that Musk might finally take the opportunity to express his optimism about his company’s future potential customers by making the move.
TSLA data by YCharts. Note: Graph uses logarithmic scale.
Even then, Tesla didn’t move on. Only after the coronavirus bearish market ran its course and Tesla shares approached $1,000 yet again did the business reverse course and authorize a split.
Why did Tesla do a stock split?
In the end, Tesla’s Aug. 11 announcement of its 5-for-1 stock split didn’t use much insight into the idea process that Musk and other business executives went through in making their decision. The release states only that the intent was “to make stock ownership more available to employees and investors”– a generic reaction that countless business utilize in comparable circumstances.
What might have prompted the move, however, was Apple’s (NASDAQ: AAPL) choice to break with brand-new convention and do a stock split. Apple’s move made more sense due to its position within the Dow Jones Industrial Average (DJINDICES: ^ DJI), in which share prices are essential in identifying the weighting of each of the average’s 30 constituent stocks.
In addition, Tesla might have anticipated its being included in the S&P 500 Index (SNPINDEX: ^ GSPC), where stock liquidity is an important factor to consider. Having more shares at a lower price doesn’t affect the calculus for how much index-tracking financiers need to own in Tesla stock, but it can make a distinction in terms of trading characteristics.
The last plume in Musk’s cap
I can see only one reason Tesla would do a stock split in 2021: to get admission to the Dow. With a stock price above $625, Tesla won’t get an invitation due to the fact that its influence over the Dow would be too great.
However at $125 per share– after another 5-for-1 split– there’s an engaging case for Tesla to join the Dow. The average hasn’t had an automaker stock in its ranks given that the previous incarnation of General Motors (NYSE: GM) declared insolvency security more than a years earlier. For a benchmark that claims to include industrial stocks, that’s a glaring omission– and one that Tesla might fairly treat.
Tesla investors shouldn’t hold out too much hope for the possibility of another stock split. As long as the share price keeps going up and the leader keeps successfully bringing brand-new electric lorries to the automobile industry, few of those investors will be too disappointed.