Fools know the value of a stock split: zero. It's a nonevent. Instead of a $20 bill in your wallet, you've now got two $10 bills. You're eating 12 smaller slices of your pizza instead of six larger ones.
So if stock splits mean nothing, why do companies 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, the market tends to view stock splits as positive events and a company's shares can get a short-term boost from the news. But if the business isn't a good, long-term company, it doesn't matter if its shares split or whether you buy them before or after.
A split decision
That's why we pair up stock-split announcements with the sentiments of the 83,000 investors at Motley Fool CAPS. Every day, professional and novice investors rate the prospects of thousands of stocks, resulting in a rating between one and five stars (five being the best). If the best stock pickers think a company's long-term performance is outstanding, and the company has announced the bullish signal to split its shares, maybe investors should take notice.
Then we dive in and see exactly what the CAPS community has to say about some of these companies. Here is a list of stocks that have recently announced splits.
|
Company |
Split |
Announcement Date |
Date Payable |
(5 max) |
|---|---|---|---|---|
|
Public Service Enterprise Group (NYSE: PEG) |
2:1 |
1/15/2008 |
2/4/2008 |
***** |
|
Woodward Governor (Nasdaq: WGOV) |
2:1 |
1/23/2008 |
2/14/2008 |
***** |
|
New Jersey Resources (NYSE: NJR) |
3:2 |
1/23/2008 |
3/3/2008 |
*** |
|
Hologic (Nasdaq: HOLX) |
2:1 |
1/30/2008 |
4/2/2008 |
**** |
All of these companies are well-liked by investors, as indicated by their CAPS ratings of three stars or better, a signal that they're just as confident about the companies' prospects as management apparently is. Yet as the market takes its toll on share prices, the need to split shares may decline, as we've seen over the past month or so.
An electrifying opportunity
Almost a year-and-a-half ago, the proposed merger between Chicago-based Exelon (NYSE: EXC) and New Jersey's Public Service Enterprise Group was officially canned, and the latter's shares proceeded to tumble. The northeastern utility has regained all that lost ground and risen an additional 30%. Much of that has been because of strong growth in power generating, which accounts for more than two-thirds of its operating income. Higher prices and reduced costs boosted third-quarter profits 35% over the prior year. Public Service Enterprise Group is set to report earnings tomorrow, and analysts are expecting earnings to grow another 32% this quarter on revenues of $3.2 billion.
Considering that Public Service trades at a discount to forward earnings compared with either NRG Energy (NYSE: NRG) or First Energy (NYSE: FE), yet is expected to grow more quickly than either, Public Service appears to be better priced than its rivals.
As CAPS investor gamblingbob noted last April, it has near-monopoly status in some markets:
They own New Jersey when it comes to electricity generation. It is also one of the best run companies that I know of.
However, CAPS player NicieNicie pointed out just a month later that the Northeast is not exactly a hotbed of growth:
Tremendous company doing tremendous work. But their service area (N.Jersey) is close to stagnant in growth, and the P/E is w-a-a-a-y overvalued as a result.
It has benefited from lowering its debt through asset sales and cash distributions from its subsidiaries, which led Fitch Ratings to upgrade Public Service's debt ratings late last year. Couple that with the repricing or expiring of below-market pricing contracts and management's pursuit of cost reductions and efficiencies, and this utility looks like a company poised for profitable growth.
Split the difference
How about you? Will profits continue to electrify utilities? Get in the mix with Motley Fool CAPS and share with tens of thousands of your fellow Foolish investors how you feel about these stock-split stories.
