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, 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.
Given the totality of the performance of crude oil transportation and storage specialist Plains All American Pipeline (NYSE: PAA ) , you could easily say it fits the "good, long-term business" criteria. In announcing a 2-for-1 stock split the other day, it noted that since its IPO in 1998, it's generated a compounded annual total return for unitholders of 19%, having seen a 137% increase in its distributions and a 330% increase in the value of its common units.
With a dividend that yields around 5% annually, it has indeed proved to be a fairly steady performer, and it just raised the payout 8% to $1.065 per share. The rationale for the split is to make the stock -- which has been hitting new highs recently and currently trades above $86 a share -- is to make more accessible to investors while increasing liquidity.
A split decision
The decimation of the dry natural gas industry from oversupply and low prices has given rise to a stampede into oil and natural gas liquids. While it makes sense to follow profits since liquids have provided better margins than the dry gas market, the pell-mell rush is starting to weaken the premise and causing NGL prices to fall.
Williams Cos. (NYSE: WMB ) and Williams Partners recorded 42% and 43% lower profits, respectively, because of liquids margins contraction, while Crimson Exploration (Nasdaq: CXPO ) saw prices fall by 25%. Crimson is one of those companies that decided to go just about all-in on oil and NGLs, as they now comprise 80% of total revenues.
That isn't deterring drillers from making the switch. According to SandRidge Energy (NYSE: SD ) , once known as a premier dry gas producer, the vast bulk of its production now will be oil and NGLs. "Oil is our future," the CEO said.
Yet it's effecting Plains All American, too, despite an otherwise strong second quarter. Revenues were up 10%, generating a 46% increase in earnings, but margins are being compressed, coming in weaker than forecasted because of falling prices. The first half of the year was over the top; the back half isn't going to be nearly as strong, and third-quarter guidance is now below that of the second as the price differential between West Texas Intermediate Midland and West Texas Intermediate Cushing contracts.
Keeping tabs on the competition
The Fool's Ryan Guenette lays out how stacking up Plains against competitors like Magellan Midstream Partners, Enbridge, or Kinder Morgan Energy Partners finds it able to hold its own.
The benefit of investing in these toll-takers is they don't care whether oil is trading at $50 a barrel or $100; their contracts are for what's flowing through their pipelines and ending up in their storage facilities. You pay the same rate regardless. As Motley Fool CAPS member WCWlooky notes, "Even if [it's] cheap, ya still gotta get it there. And if it goes up. Yup, still gotta get it there."
With the current state of infrastructure unable to meet capacity needs, look for the toll collectors to continue to prosper in the years to come.
The market researchers at IHS Global Insight expect almost $2 trillion worth of investments to be made in pipelines, transport, and storage facilities by 2035, but with some of the heaviest activity coming within the next few years. The energy consultants at Bentek say Permian Basin crude oil production alone will jump 60% by 2016, which bodes well for Plains as it just brought a 15-mile pipeline online to bring Permian crude to market. It also entered into a joint venture with Enterprise Products Partners (NYSE: EPD ) for a crude oil pipeline in South Texas.
Price is what you pay
At 17 times earnings estimates, Plains is valued like much of the rest of its peers, though with its enterprise value trading at 26 times the free cash flow it generates, it is really running more than a tad expensive. Obviously a stock split won't change the valuation, so I'd wait for a real pullback in its share price before buying in.
I think Plains All American Pipeline is a good long-term investment, just not at any price. Tell me in the comments box below what price you think would make it a bargain.
Split the difference
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