Stock Split Watch: Is Eli Lilly Next?

Investors generally don't turn to pharmaceutical stocks with expectations of high growth in a short period of time. Instead, they scoop up these players for their promise of steady gains over the years and often dividend payments too.

But Eli Lilly (NYSE: LLY), in recent years, has offered investors the safety pharma stocks are known for and impressive growth. This is thanks to the company's leadership in the dynamic area of weight loss drugs. Lilly's Mounjaro -- approved for Type 2 diabetes but often prescribed for weight loss -- and Zepbound -- specifically approved for weight loss -- have been delivering blockbuster revenue. And that's driven the stock to a 200% gain over the past three years.

In fact, this exciting growth story recently pushed Lilly stock to a key level, surpassing $1,000. Does this make Lilly an ideal candidate for a stock split? Let's find out.

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More shares for current holders

First, let's zoom in on the subject of stock splits and consider why companies launch such operations. A stock split lowers the value of each individual share -- without altering the company's overall market value or any other fundamental element. Companies execute splits by offering additional shares to current holders, and the number is determined by the ratio of the split.

So, for example, in a 10-for-1 split, if you originally held one share of a company, you would hold 10 shares after the operation. The value of your holding, though, would remain the same.

Companies decide on such operations for a simple reason: They bring stocks that have climbed significantly within reach for smaller investors. (It's true that fractional shares offer these investors an option, but some brokerages don't offer them.)

Now, let's consider whether a stock split may be in the cards for Lilly. As mentioned, the pharma giant has seen its stock roar higher in recent years as investors saw the growth potential of the company's weight loss portfolio and aimed to get in on this story.

The level of $1,000 per share

And this brings me to my first point: At about $1,000 today, Lilly trades at a level that may represent a psychological limit for some -- around this price, even if valuation is reasonable or low, certain investors may hesitate to get in on the stock. This could hold back stock performance, and therefore, it's probably the strongest point to support the idea of launching a stock split in the near future.

Lilly also could benefit from planning a stock split because such an operation shows confidence about what's ahead. If the company is ready to launch a split, management probably believes the stock has what it takes to continue advancing post-split.

Finally, as I said above, such a move would open the investing opportunity up to a wider range of people -- and that's positive for the company and for investors.

Considering all of this, is Lilly ripe for a split? History shows us that Lilly has launched stock splits in the past, but it's important to also keep in mind that the past four splits all occurred prior to 1998. Since that time, Lilly's strategy and views regarding stock splits may have changed. And at the time of those operations, Lilly stock traded for around $100 or less -- since, the stock has rocketed higher, and the company hasn't announced any new splits.

Could Lilly be the next stock split?

Let's return to our question: Could Lilly be one of the market's next big stock splits? I think it would be a great move for the reasons I've talked about above. Lilly has the opportunity to announce such an operation in its next earnings report -- but we'll have to wait several weeks for that since Lilly just reported quarterly earnings in late October. And the path of the stock in the weeks ahead also may determine whether the company announces such an operation. For example, if Lilly's stock remains above the $1,000 mark, management may be more likely to opt for a stock split than if it falls from that level.

In any case, whether Lilly decides to take this route or not, this stock continues to be a solid buy for investors looking to add both growth and safety to their portfolios.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.