Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, though, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
That's why we pair up stock-split announcements with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think a company's long-term potential is outstanding, and the company is giving off bullish signals, maybe then investors should take notice.
Here are two stocks that recently announced their intention to split their shares.
Current Share Price
|CME Group (NYSE: CME )||****||5:1||July 20, 2012||$257.01|
|Dollar Tree (Nasdaq: DLTR )||***||2:1||June 26, 2012||$99.94|
Don't blindly buy into a split -- you still need to do some research. Use the announcement as a jumping-off point to determine whether its shares are two or three times as good as before.
Exchange operator CME Group withdrew from the bidding for the London Metals Exchange and a week later is splitting its stock 5-to-1. With a sagging stock that is off 4% from where it traded last year and down 15% from its recent highs, it looks like the exchange is trying to pick up sagging investor spirits.
CME had been one of four suitors for the LME, including IntercontinentalExchange, NYSE Euronext (NYSE: NYX ) -- which was kicked to the bidding curb -- and Hong Kong Exchanges and Clearing. Investors complained at its annual shareholder meeting about the falling share price, and it's been noted that volumes of CME's stock are about 10% lower than they were a year ago. If it can't perk up interest in the company with a big acquisition, making its stock theoretically more affordable to more retail investors ought to do the trick.
It also dropped the margin requirements on gold by 10%, down to $9,113 for a 100-ounce gold contract from one to four months, the second time it has done so this year, in a bid to increase volumes.
But CME contends that part of its image problem with investors was that it was designated a "systemically important" institution, which might have increased worries that it would have to raise capital to protect itself against possible failures by its most important clients.
While the split may make its stock cheaper, it seems an artificial way to try to boost investor interest. It also won't do much to quell concerns about greater regulatory scrutiny. While the CAPS community remains supportive of its prospects for beating the Street going forward, add the exchange to your watchlist and tell me in the comments section below or on the CME Group CAPS page if its decision to split its stock makes sense or if are there other measures it could or should take to appease investors.
A special niche
A C-note seems like a pretty price to pay for a dollar-store chain, but unlike CME Group, Dollar Tree is offering investors a healthy canopy of growth. First-quarter earnings soared 22% from the year-ago period to $1 per share as it increased sales and widened margins. Same-store sales were up 5.6% compared to a pretty robust 7.1% in the year-ago period.
That kind of performance has led to shares trading 60% higher than they were last year, and they're up 20% over the first five months of 2012, putting it ahead of rivals Dollar General (NYSE: DG ) and Family Dollar (NYSE: FDO ) as well as big-box rivals like Wal-Mart and Target.
The poor economy has made deeper discounters like Dollar Tree a more popular destination, and through its Deal$chain, it has been able to continuously push the boundaries of what price points it offers that belie the "dollar store" moniker. As a result, it's generating copious amounts of free cash flow that it is using to repurchase shares at an accelerated pace.
CAPS member kpoeppel says Dollar Tree has proven itself adept at being able to continuously grow and be profitable at the same time, though he's worried about the lack of a competitive moat. It could be, though, that in this economy there's more than enough room for everyone to be in the space, which likely accounts for the strong performance for its rivals, too.
Add the dollar-store chain to the Fool's free portfolio tracker, then let us know on the Dollar Tree CAPS page if bringing its stock closer in price to the items it sells will spur more interest in the company.
Split the difference
Head over to the completely free CAPS service and let us hear what you've got to say about these or any other stocks that you think we should split hairs over. And if you're looking for dividend-paying stocks to balance out your portfolio, check out The Motley Fool's free report "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can be among the first to get analysis of a market leader in payment systems and a high-yielding energy company by accessing this report. Simply click here -- it's free