Two Shares Can Be Better Than One

9/24/2012


Investors like stock splits.

Logic suggests they shouldn't care, because splits don't affect the value of an investment. Suppose you own 100 shares of a $50 stock that splits 2-for-1. After the split, you'll own 200 shares of a $25 stock, the same $5,000 position you held before.

But you don't invest in a vacuum, and the effect of stock splits cannot be fully explained by multiplying share counts and dividing stock prices.

Numerous studies have shown that stocks tend to outperform after announcing stock splits — even if investors bought shares several days after the announcement. In contrast, stocks that announce reverse splits, in which they consolidate multiple shares into a single, higher-priced share, tend to underperform.

While academics no longer dispute the unusual returns of stocks that split their shares, many will debate the reasons. Here are just three possibilities:

• Companies split their stocks when the shares become too expensive to entice investors, thus increasing demand for those shares.

• When management is optimistic about a company's future profit or cash-flow growth, it signals that confidence via a stock split. Subsequently profits rise, further driving up the share price.

• Companies tend to split while stocks are going up, and plenty of other research suggests that stocks rising in price tend to continue rising.

Those last two rationales are self-fulfilling, suggesting that companies already in line for strong stock-price gains are more likely to split their shares. And to that we respond: So what? If you own a stock that splits its shares, just enjoy the ride.

Unfortunately, splits have yet to regain all of their popularity. Apparently, the 2008 market meltdown has more than just investors spooked. According to Briefing.com, 235 U.S.-traded equities have split their stock at least 11-for-10 since the start of 2008. In 2005 alone, there were 319 splits. After just 12 in 2009, the number of splits rose in 2010 and 2011. The split count is on pace to decline this year, but even if the trend reverses, we won't come close to the numbers seen from 2004 through 2007.

Should you buy a stock simply because it announces a split? Of course not, because a split does not guarantee outperformance. But investors should take a positive view of a split announcement — especially if it comes from a stock with strong profit-growth potential and solid recent returns over the last year. Above we list eight stocks that have split in the past and have risen to within 25% of the price when they last split, plus four that have never split, but have seen their stock prices grow large enough to put off many investors.

STOCK-SPLIT CANDIDATES
Total Return
Est. EPS
---- Growth ----
---------- Last Stock Split ----------
Company (Price; Ticker)
6
Mos.
(%)
12
Mos.
(%)
Curr.
Year
(%)
Next
5 Yrs.
(Ann.)
(%)
Date
Ratio
Price
($)
Gain
Since
Split
(%)
Stocks poised for next split
Abbott Laboratories
($69; ABT)
16
37
8
9
6/1/98
2-for-1
74
86
Aflac ($49; AFL)
4
41
3
10
3/19/01
2-for-1
54
81
Apple ($702; AAPL)
16
71
60
24
2/1/05
2-for-1
89
1,478
Bed Bath & Beyond
($68; BBBY)
4
14
16
14
8/14/00
2-for-1
38
262
Chevron ($117; CVX)
9
22
(5)
(6)
9/1/04
2-for-1
100
134
Exxon Mobil
($92; XOM)
7
27
(9)
4
7/19/01
2-for-1
84
118
McKesson ($87; MCK)
0
15
14
14
1/1/98
2-for-1
105
66
Wal-Mart Stores
($74; WMT)
24
45
10
10
4/20/99
2-for-1
90
65
Potential first-time splitters
Alliance Data Sys.
($142; ADS)
14
48
12
16
None
CF Industries
($220; CF)
20
27
18
12
None
Google
($718; GOOG)
13
31
19
16
None
Visa ($134; V)
15
50
23
19
None

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