Could the Sony Stock Split Be Huge? History Says This Will Happen Next.

This is the year of stock splits, it seems. Retail behemoth Walmart was the trendsetter, executing its split in February with dozens of companies following suit. The highest-profile splits came in the summer when the anointed leader of the artificial intelligence (AI) boom, Nvidia, split its stock 10-for-1, and the hottest fast-food stock, Chipotle Mexican Grill, executed one of the largest in history, splitting its stock 50-for-1.

Why the recent stock-split trend? Well, as share prices climb too high, they begin to exclude portions of the retail market and the stock becomes less liquid, affecting even investors with deeper pockets. A split is also a great way to signal to the market that your company is doing well.

So what might be in store for the longtime consumer electronics leader, Sony (SONY 0.11%) following its recent 5-for-1 stock split? With all the splits this year — and the thousands from years past — we’ve got a pretty decent data set from which to draw conclusions.

Here’s what history tells us about stock splits

Since Nvidia’s split, its stock is up about 10%. Since Walmart’s, the stock is up about 34%. Chipotle hasn’t fared so well; its stock is down 10% since its split. These may be a mixed bag, but the truth is that more often than not, a stock does well after it splits. The average return after a stock split is announced in the year that follows is 25.4%. That’s about a 13% greater return than the market over the same period. This chart lays it out nicely.

Stocks tend to do well after a split. Image source: Statista. 

However, we need to be careful here. Correlation is not causation. Stocks that split tend to be doing well already, so their post-split performance may simply be a continuation of their pre-split momentum. Furthermore, just because the average is positive, it doesn’t mean that it will be so every time. Just look at Chipotle.

So will Sony follow in Chipotle’s steps or Walmart’s?

Much more than an electronics company

Sony gave the world the Walkman. I may be dating myself here, but its brand is likely to forever be associated with consumer electronics. Yet, today, it’s so much more. The company is a proper conglomerate with a hand in many different businesses.

To be sure, its PlayStation is still big business, but entertainment at large is the name of the game for Sony now. The company’s core philosophy is centered around Kando, which translates to “emotion.” Its mission is to “fill the world with emotion, through the power of creativity and technology.” Rather than simply create and market electronics, Sony is in the business of making people feel.

Sony’s film and music arms are some of the largest and most influential studios in the world and they are big business for the company, representing about a third of its total net income.

The strategy is working — mostly. Its revenue is increasing steadily along all business arms save one, financial services. Sony only increased sales by 1.6% year over year. That’s anemic. However, if you exclude financial services, sales increased 12.3%. That’s looking a lot healthier without the segment. Good thing it won’t be on the books much longer.

Sony is planning to spin off most of the division into a separate entity, the Sony Financial Group. Sony shareholders will receive stock in the new company and Sony itself will retain a significant stake. It’s unclear exactly how this will impact shareholders, but the good news is that the new company will aim to deliver 40% or 50% of its net income to shareholders via dividends. It brought in nearly $320 billion in profit last year, so these dividends will not be trivial.

Given the condition of the business and its current valuation — it has a price-to-earnings (P/E) ratio of about 17, more than reasonable when looking at its competition — I would be inclined to say Sony will follow in Walmart’s steps rather than Chipotle’s. However, given the upcoming spin-off, I would wait for more details so its impact can be more completely understood.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.