Stock splits are in vogue, again, and some of the biggest names in the stock market are looking to split their shares. After seeing a long period during which three-digit and even four-digit share prices became badges of honor rather than impediments to small investors, some massive moves, like the 20-for-1 stock splits that Amazon.com and Alphabet have done, are getting investors to pay attention to splits, once again.
Long-term investors know that the power of compounding can produce amazing returns over the long haul. One similar concept, though, gets largely ignored by most shareholders: A consistent track record of stock splits can indicate huge long-term returns, even when the share price seems modest. For the most impressive example of this, you only need to look at beverage pioneer Coca-Cola (KO 0.31%).
Start with one, end with thousands
Coca-Cola stock began trading in 1919, and in just over a century, the soft-drink maker has done stock splits on a regular basis. It took eight years before Coca-Cola did its first 2-for-1 split, coming in the boom era of the 1920s. More noteworthy was Coca-Cola's 4-for-1 split in 1935 during the depths of the Great Depression, which serves as a reminder to investors that even during the worst of times from an economic standpoint, some businesses can remain stalwart stock holdings.
It took a quarter-century, but Coca-Cola went back to the split strategy in 1960 with a 3-for-1 move. Throughout the up-and-down market period in the 1960s and 1970s, Coca-Cola made three different 2-for-1 splits, and a 3-for-1 stock split came in 1986. The bull market of the 1990s brought three more 2-for-1 splits in 1990, 1992, and 1996, and the last such move came in the form of a 2-for-1 split in 2012.
All those stock splits multiply long-term holdings in a staggering way. If you had owned just a single share of Coca-Cola a century ago, you'd have 9,216 shares today -- and even at a modest price of just $60 per share, your holdings would be worth roughly $550,000.
Adding even more fizz to a solid stock-price return
That might seem like reward enough, but investors have gotten even more out of Coca-Cola over the years. That's because, in addition to its impressive stock-split history, Coca-Cola has also consistently paid out dividends to its shareholders. Indeed, for nearly 60 years in a row, the beverage giant has not only made regular quarterly payments, but also increased them on an annual basis.
The difference that makes to total returns is much larger than you might think. If you simply took the dividend payments and spent them, then calculating just since the early 1970s, you would have enjoyed a nearly 4,200% gain in your stock holdings. However, if you had reinvested the dividends, you would've boosted your total return to nearly 10,000%.
Even now, Coca-Cola is a great dividend stock. With its $0.44 per-share quarterly payout, the stock yields close to 3% at recent prices, which is well above the average market dividend yield.
Are Coca-Cola's best times behind it?
Some investors don't think that Coca-Cola is a great investment right now. Its core sugary soft-drink business has been under threat for years, and despite efforts to pivot toward healthier alternatives, progress has been slow. During the bull market of the 2010s, the company's stock performance lagged behind higher-growth companies.
Yet long-term investors can appreciate the value of a strong business with devoted customers that are loyal to its products. With one of the world's most recognized brands, Coca-Cola has the ability to carry its popularity forward to future generations. That's been the secret of success for the business for a long time, and Coca-Cola's stock splits are only a result of its business strength, rather than the cause.
