Stock Split Watch: Is Eli Lilly Next?
The market has been ripe with stock splits in recent times, with companies from tech giant Nvidia to fast-casual restaurant chain Chipotle Mexican Grill announcing them. This occurred after these stocks soared in recent years, in many cases reaching into the thousands of dollars. Companies launch stock splits to lower the price of each individual share, making the shares more affordable for a broader range of investors.
Investors look for these opportunities for two reasons. First, they make it possible for buyers to take a small stake in a particular company without relying on fractional shares. And second, stock splits often show a company is confident about its future, with the idea that the stock could take off once again from its new lower level.
How can you identify a potential stock-split candidate? When a stock advances over time and eventually trades for several hundred dollars (or more), a company might consider launching a split. A pharmaceutical player that falls into that category today is Eli Lilly (NYSE: LLY).
The company's shares have climbed more than 50% so far this year, surpassing $900. Could Lilly soon announce a split?
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Why Eli Lilly stock has climbed
First, it's important to consider why Lilly's shares have increased so much. The company has a solid diversified portfolio of drugs focused on immunology, diabetes, cancer, and more. Over time, these treatments have helped Lilly to grow revenue and net income into the billions of dollars.
But the products that have truly driven recent revenue gains and share performance are Lilly's weight loss drugs. The company sells Zepbound, specifically for this indication, and Mounjaro, which is officially approved for type 2 diabetes but is often prescribed by doctors for weight control.
Mounjaro, approved back in 2022, saw revenue soar last year to the blockbuster level of more than $5.1 billion. And Zepbound, which won a regulatory nod late last year, brought in $517 million in its first full quarter on the market -- meaning it's well on its way to becoming a blockbuster, too.
The following two points suggest these drugs could continue to significantly boost revenue well into the future.
Zepbound recently delivered positive results in a phase 3 trial for obstructive sleep apnea, and Lilly submitted the drug to the U.S. Food and Drug Administration for potential approval in that indication in obese adults. A regulatory thumbs up here would be great news for Lilly since Medicare only covers weight loss drugs if they're also approved for an additional health benefit. And Medicare coverage is a key factor for the uptake of the drug.
Demand surpasses supply
That said, demand for Lilly's weight loss drugs -- and those of rival Novo Nordisk -- is surpassing supply, and the two companies have had to ramp up manufacturing infrastructure to try to keep up. Lilly has committed more than $18 billion to manufacturing investments since 2020, a step that should help it generate more and more revenue from these drugs, which are in high demand.
Now let's consider the case for a potential Lilly stock split. The company has completed four 2-for-1 stock splits, and the latest one was more than 25 years ago. Those splits happened after periods of gains when the shares had reached about $100 -- a far cry from today's level. This shows Lilly has been open to stock splits after the stock has significantly advanced, though the last one was quite some time ago.
The advantage of a stock split now
An advantage of Lilly launching a split now is this would open the stock up to more investors at a time when growth is going strong -- and this growth easily could power more share-price performance. As I mentioned above, Lilly's weight loss drugs have taken off, and the company's manufacturing ramp up, as well as a new indication for Zepbound, could add to sales potential.
On top of that, Lilly's studying additional weight loss candidates in phase 3 trials. If all goes well, these could represent more growth down the road.
Finally, a price of $900 or more could stop some investors from hitting the buy button. In some cases, they may want to make a smaller investment in the pharma company, and their brokerages may not offer fractional shares. A level close to $1,000 represents a psychological barrier for investors who may perceive the stock as expensive, even if the valuation is reasonable.
Splitting its stock now or in the near future would be a great move for Lilly. Of course, it's impossible to predict with 100% accuracy whether the company will announce a split. But the good news is, even if Lilly doesn't do one, the stock still represents a great one to buy and hold for the long term, thanks to the company's solid past performance and future prospects.
Should you invest $1,000 in Eli Lilly right now?
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Adria Cimino 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 Novo Nordisk. The Motley Fool has a disclosure policy.