Are Stock Splits Millionaire Makers?
http://www.fool.com/investing/small-cap/2007/06/29/are-stock-splits-millionaire-makers.aspx
Selena Maranjian
June 29, 2007
Here we go again -- an old, familiar subject: stock splits. I've been writing about them for more than a
decade now, generally concluding that they're mostly meaningless. Still, it seems that there's always
something new to say about them. And in fact, I recently stumbled upon some interesting
perspectives. I'll share them with you shortly, but first let me recap some split basics:
•
One reason stock splits aren't too meaningful is mathematical: If your 100 shares of
Meteorite Insurance (ticker: HEDSUP) are trading at $40 each, they're worth $4,000. If the
company splits it stock 2-for-1, you'll have 200 shares trading at $20 each, worth ... $4,000.
Big whoop. If the dividend before was $1.20 per share, giving a yield of 3%, the dividend
post-split will be $0.60 per share, giving a yield of ... 3%. Yawn.
•
Why do companies split their stocks? For several reasons. Sometimes they want more
outstanding shares to increase the stock's liquidity (reduce bid-ask spreads), or perhaps to
meet some listing requirements for the exchange on which they trade. Sometimes they may
want their price to be lower to attract more investors who think that low prices are better
bargains. (They're not. A $500 stock can be undervalued, while many $1 stocks are
overvalued.)
•
One positive argument for splits is that they signal management optimism. That is, if a
company were expecting trouble, its bigwigs probably wouldn't split its stock, as it would then
fall into even lower territory, looking more pathetic. Another argument is that a company will
probably have done something good to reach a point where it splits. So it stands a good
chance of continuing to do well.
Seeking out splitters
You may have gathered that I don't go out of my way to find splitting stocks. Still, perhaps you and I
should -- a recent Forbes.com article excerpted from Dow Theory Forecasts suggests so. In it,
Richard Moroney makes a case for seeking out serial splitters. He notes that, "In two studies by
researcher David Ikenberry that covered more than 20 years of stock returns, stocks that split
outperformed the market by an average of 8% in the year after the split and at least 12% over the
next three years."
Moroney then lists several "quality companies that are up sharply since their last split," noting that,
"All seven stocks are worthy of purchase on their own merits, and the possibility of a stock split
represents an extra kicker." The firms included FedEx (NYSE: FDX) (last split 2-for-1 in May 1999 and
up 108% since then), ExxonMobil (NYSE: XOM) (last split 2-for-1 in July 2001 and up some 122%
since then), and PepsiCo (NYSE: PEP) (last split 2-for-1 in May 1996 and up about 160% over 11
years).
Who knows when, or if, these companies will split again, though. If you want some verified splitters,
check out Yahoo! Finance's stock-split calendar. I found these recent splits listed there:
Split date
June 14
June 15
June 22
June 22
Company
Crocs (Nasdaq: CROX)
Buffalo Wild Wings (Nasdaq: BWLD)
Gilead Sciences
Express Scripts
Split ratio
2-1
2-1
2-1
2-1
But wait!
Before you rush off to seek out stock splitters, here's another point of view:
Scott Rothbort of LakeView Asset Management has noted that there seem to be fewer stocks splitting
these days, and he thinks the trend might continue. As evidence, he points to a longer-than-usual
collection of companies with prices above $100 per share, such as Apple (Nasdaq: AAPL) and
Goldman Sachs (NYSE: GS). He notes that high prices might keep more speculators away, and he
also offered a reasoning that I hadn't thought of before: That a high stock price can be valued by a
company as a sign of success, and therefore prestige. It can attract certain investors, just as a low
price can attract other kinds of investors.
Longtime Fool contributor Selena Maranjian owns shares of PepsiCo. She recently learned that the
eyes of goats and octopuses have rectangular pupils. For more about Selena, viewher bio and her
profile. Buffalo Wild Wings is a Hidden Gems recommendation. FedEx is a Stock Advisor
recommendation. The Motley Fool is Fools writing for Fools.