More U.S. Stocks Doing The Splits

8/31/2010


Through Aug. 24, U.S.-traded companies had announced six times as many stock splits as they did in the same period last year. But the cupboard is still looking pretty bare, with split activity down sharply from levels in 2005, 2006, and 2007. For instance, more companies split their stock in June 2006, the busiest month for stock splits in at least five years, than in the 12 months ended Aug. 24.

Is this trend important? After all, stock splits have no fundamental impact on a company, neither creating nor destroying value. The stock’s price simply declines proportionately to the number of new shares issued, such as one $100 share becoming two $50 shares.

However, the market does tend to react positively to splits. Shares of the 799 U.S.-traded stocks that have announced stock splits since the start of 2005 rose by an average of 2% on the first trading day after the announcement, with nearly three out of four stocks climbing on the news.

Splits can give stocks a psychological lift. Investors often view the news as a signal from management that the company’s growth prospects will support further stock-price appreciation. A University of Chicago study found that analysts often raise a company’s profit forecasts for the next fiscal year around the time of split announcements.

Companies tend to use splits to keep shares trading within a price range — many prefer not to allow their share prices to rise too high, frightening off individual investors. Among stocks that have split since the start of 2005, the average closing price was $57 on the day before the announcement. This average excludes Berkshire Hathaway ($77; BRKb), which split 50-to-1 at $3,476 per share. Given the market’s decline since 2007, it’s not surprising that the number of splits has declined in the past couple years.

But opportunities still exist. The table below shows stocks that have climbed to within 25% of the price of their last split. Below, we review four of these stocks, all potential stock-split candidates.

Earlier this year, speculation swirled that Apple ($240; AAPL) would announce a four-for-one stock split. The shares bounced on what proved to be idle chatter, but there are reasons to believe a split could be in Apple’s future. The move would not be without precedent, considering Apple split its stock 2-for-1 in 1987, 2000, and 2005. Since the last split, the shares have jumped 435% and now trade at a price exceeded by only six stocks in the S&P 1500 Index. More than 90% of the stocks in the index trade below $60 per share.

A bigger question is whether Apple will restart its dividend, discontinued in 1995. The company holds $24.29 billion of cash, or $26 per share, with no long-term debt, and has generated more than $14 billion in free cash flow over the last year.

One Wall Street analyst went as far as to write an open letter to CEO Steve Jobs earlier this month, urging him to introduce a regular dividend equating to a yield of 4% and buy back a huge chunk of stock. While we don’t expect a 4% yield, neither a stock split nor a large buyback would come as a surprise. Apple is a Long-Term Buy.


Lubrizol’s ($88; LZ) Performance score of 89 reflects the stock’s 22% gain this year. Even before the most recent rally, the shares traded above the price level of Lubrizol’s previous split, which occurred in 1992. In the past month, consensus estimates for 2010 profits have increased 14% to $9.94 per share, implying 32% growth on 18% higher revenue. The share price hasn’t yet caught up with expectations, and Lubrizol trades at less than nine times estimated current-year earnings, a 29% discount to specialty-chemical stocks in the S&P 1500 Index.

Lubrizol makes additives for industrial polymers and motor oil. These chemicals enhance the final products’ performance yet typically comprise a small portion of their overall cost. The Overall score of 99 is supported by ranks of 85 or higher in five of the six Quadrix® categories. Lubrizol is a Focus List Buy.


Discount retailer TJX ($41; TJX) thrives in challenging economic environments. It profits from the mistakes of other retailers and manufacturers, swooping in to purchase canceled shipments and overproduced clothing and accessories.

TJX has grown sales at least 5% in each of the last four quarters. The stores have improved their efficiency, delivering top-line gains despite keeping less merchandise on the shelves. In the June quarter, inventory was 7% lower than year-ago levels. The company faces tough year-to-year comparisons in the near term, and TJX sees same-store sales flat to down 1% in the second half of 2010. But its business model should hold up better than those of other retailers as long as consumers remain focused on bargains.

The retailer executed three 2-for-1 stock splits between 1997 and 2002. In the past year, shares have spent some time above the most recent split price of $44. At 12 times trailing earnings, the stock trades 19% below its five-year average. TJX is a Buy and a Long-Term Buy.


Varian Medical Systems ($52; VAR) is one of the biggest makers of cancer-treatment products, X-ray tubes, and medical-imaging systems. Shares have advanced 4% since the end of May and 11% for the year, while the S&P 500 Index has declined during both periods.

Now the stock trades within 24% of $69, the price of its last stock split. The shares could push higher should Varian ease investor concerns about weak order trends and suspicions that hospitals could delay purchases of capital equipment. Supporting the Varian story are improving profit margins, the result of a more favorable product mix that features new devices for treating cancerous tumors.

The stock’s rally has lowered its Quadrix Value score to 36, but Varian’s strong balance sheet and market niche make it an attractive play. Rising analyst estimates project per-share profits of $2.94 in fiscal 2010 ending September, implying 11% growth, followed by another 10% gain in fiscal 2011. Management tends to be conservative in its guidance, and quarterly per-share profits have topped the consensus by at least $0.04 in each of the last four quarters. Varian Medical is a Focus List Buy and a Long-Term Buy.

STOCK-SPLIT CANDIDATES
All nine of the recommended stocks below have rallied to within 25% of the price of their last stock split. Two are trading well above the split price. All are good candidates for a split in the next 12 months.
————— Last Stock Split —————
Discount or
Premium to
Last Split
(%)
—– Total Return —–
Company (Price; Ticker)
Date
Ratio
Approximate
Price
($)
6
Months
(%)
12
Months
(%)
52-Week
Price Range
($)
Quadrix
Overall
Score
Advance Auto Parts ($54; AAP)
9/26/05
3-for-2
59
(7)
35
28
56
-
36
95
Aflac ($45; AFL)
3/19/01
2-for-1
54
(16)
(5)
12
57
-
38
98
AmerisourceBergen ($28; ABC)
6/16/09
2-for-1
36
(22)
1
36
33
-
21
81
Apple ($240; AAPL)
2/28/05
2-for-1
90
167
22
42
279
-
164
97
CSX ($47; CSX)
8/16/06
2-for-1
63
(24)
2
9
62
-
41
88
Lubrizol ($88; LZ)
9/1/92
2-for-1
51
74
15
45
98
-
61
99
Ross Stores ($50; ROST)
12/19/03
2-for-1
53
(6)
6
9
59
-
42
94
TJX ($41; TJX)
5/9/02
2-for-1
44
(7)
5
17
49
-
35
87
Varian Medical Systems ($52; VAR)
8/2/04
2-for-1
69
(24)
8
28
58
-
36
74
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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