Japanese Firms That Chose Stock Splits Are Outperforming the Market

Japanese companies that conducted stock splits recently have seen their shares outperform the market, showing one reason why investors can’t get enough of those equities.

(Bloomberg) — Japanese companies that conducted stock splits recently have seen their shares outperform the market, showing one reason why investors can’t get enough of those equities.

More than 80 Japanese firms including chip device maker Rohm Co. and Shin-Etsu Chemical Co. have announced stock splits so far in 2023, almost double the pace of a year earlier and the most for the period in five years, according to data compiled by Bloomberg. 

While dividing up equity into more shares shouldn’t affect its total value, the move lowers the price per stock, making it more affordable for less cash-rich investors to buy. The added demand often boosts the share price as well, offering investors further incentives to put their money in the split equities.

In fact, more than half of Japanese companies conducting stock splits this year have outperformed the Topix index a month after announcing the move, according to Bloomberg calculations. Moreover, the divided shares tended to have sharper price moves than the market benchmark, and they beat the Topix by about 5 percentage points on average a month after disclosing the step.

The increase in stock splits is part of a push in Japan to attract more buyers in the equity market partly by making it easier to trade the securities. As Japan’s share indexes surge to levels last seen in the 1990’s, the nation’s investors are on the lookout for corners of the market that have potential for further gains. That’s especially the case with more tax breaks planned for Nippon Individual Saving Accounts, or NISA, a program aimed at encouraging households to invest in riskier assets.

“Stock splits should be a neutral factor for share prices, but past analyses have shown a tendency for prices to rise after the announcement,” said Chizuru Morishita, a researcher at NLI Research Institute. The stock advances may be happening partly because of expectations of increased liquidity fueled by an expanded investor base, she said.

Rohm shares are an example of outperformance after a split. The tech company’s stock has climbed 10% after announcing the measure on June 5, outpacing the 1.1% rise in the Topix during the period. Resort operator Oriental Land, meanwhile, has seen its share jump 44% since its Dec. 27 disclosure, beating the 17% gain in the Topix during the period, though the company is also benefiting from the re-opening of the economy as a weakening yen draws in tourists from abroad.

Not all stocks that split have found investor favor. Nippon Telegraph & Telephone Corp. shares, for example, dropped 1.9% after the company announced a 25-for-1 split during market hours on May 12.  

The stock-split boom comes as Japan’s share market is gradually transforming itself to become more like its overseas peers. Activist investors have been calling on companies to move away from one dominant characteristic in the past: the web of cross shareholdings in each others’ stocks that kept the market stable but tended to limit trades.

Less Stability

“The dissolution of cross-shareholdings means, in a sense, a decrease in stable shareholders for the corporate side,” said Makoto Sengoku, an analyst at Tokai Tokyo Research Institute Co.

Enter individual investors, keen to buy shares with more NISA tax breaks coming up next year. The Tokyo Stock Exchange is also trying to make it easier for small-scale buyers to get into shares by asking companies to make the desired share investment range between 50,000 yen ($351) and 500,000 yen. That’s spurring companies to do share splits to reduce share prices to get into that range, though there were still 20 companies from 2021 to 2023 that took such measures during the period but were still above the top level, according to data compiled by Bloomberg.   

Those factors will likely continue to prompt stock splits in Japan ahead.

Announcing splits will tend to boost shares on expected retail investors demand, and also because it’s a signal “that the company is confident that the share price will go up when it does so,” said Kenji Abe, a strategist at Daiwa Securities Co.

–With assistance from Hideyuki Sano, Yasutaka Tamura and Masashi Kawabata.

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