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 investors should take notice.
Here are two stocks that recently announced their intention to split their shares.
Current Share Price
NA = not available.
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 as good as before.
Coke and Diet Coke are the two most popular soft drinks. PepsiCo's
But the real secret to Coke's success is its presence in emerging markets. Volume growth in North America might have been up 2% last quarter, but it was up 20% in India and 9% in China. Even in financially wracked Europe, it was experiencing growth. And it's not just the fizzy stuff that sells. Packaged water volumes were up 15%. That's one of the reasons CAPS member Savant111 likes the drink maker, along with its ability to control costs.
In essence, this is what a company executing perfectly on its business plan looks like. But as the Fool's Dan Caplinger cautions, Coke at 20 times earnings is not as cheap as it once was: "… even if the share price gets cut in half in the near future, the stock will still trade at around 20 times earnings -- no longer the bargain that you could have fetched a few years ago."
While that's a premium to Pepsi, the better operational performance may warrant the higher sticker price. Tell us on the Coca-Cola CAPS page or in the comments section below if Coke will taste just as sweet at half the price. Add the stock to your watchlist to see if management's enthusiasm for making its stock more attractive to a broader investing audience ends up gearing it for making short-term decisions instead.
Evil is as evil does
Google's come a long way from its "do no evil" days; many now think it personifies the very practices it once criticized. Running the company for the benefit of its founders, as the proposed split suggests it would, could be another step on its path to the dark side.
The search king's split isn't the feel-good future growth vision that most splits offer, but rather is an attempt to consolidate power in Larry Page's and Sergey Brin's hands. The split would create a new class of publicly traded, nonvoting capital stock. Current Google shareholders would receive one new share of the nonvoting stock for each share of stock they own, giving investors twice the number of shares they had before. As Page and Brin recently wrote: "we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users"
No doubt they have. But that's why the hackles have been raised on the necks of corporate governance firms. And analysts say the two founders are determined to run the company the way they want so consolidating power in their hands, as the split would do, allows them to spend shareholder resources on wind farms, space ventures, and any other cockamamie idea the two dream up. Mark Zuckerberg will be maintaining control of Facebook after its IPO and no doubt Brin and Page jealously want a similar amount of control.
When you compare the quarterly results Google just posted, where revenues were in line with expectations, with those of say Apple, it explains why I chose the latter to invest in rather than the former.
I've rated Google to underperform the market over the next few years because I think many investors will see management has little interest in running the company other than for the benefit of insiders and will abandon the stock. It may be dominant in certain fields, but being able to go off on a whim without consideration for the greater shareholder good is abhorrent to good governance.
Add Google to the Fool's free portfolio tracker if you want to watch the Darth Vader of stocks complete its transformation from Jedi Knight to head of the Evil Empire.
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 "2 Dirt-Cheap Stocks With HUGE Dividends." 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 just-released report. Simply click here -- it's free.