I happened to be looking at the list of companies whose stock split in November. Some investors, like Warren Buffett, don't believe in stock splits. Others think a lower stock price improves the marketability. There probably isn't a definitive answer. However, it got me thinking about a stock's one-year performance immediately following a split. Going back to November 2008 and 2009, I've taken five stocks from each year and looked at their one-year performance and in the case of 2008, the two-year performance. Let's see if it pays to invest in the stock-split portfolio.
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Stock Splits - March 2009 to September 2009
|Company||Stock-Split Date||Split Amount||One-Year Return|
|United Therapeutics (Nasdaq:UTHR)||Sept 23/2009||2 for 1||6.6%|
|Abovenet (Nasdaq:ABVT)||Sept 4/2009||2 for 1||15.2%|
|AmerisourceBergen (NYSE:ABC)||Jun 16/2009||2 for 1||45.6%|
|GreenMountain Coffee Roasters (Nasdaq:GMCR)||Jun 9/2009||3 for 2||7.7%|
|Myriad Genetics (Nasdaq:MYGN)||Mar 26/2009||2 for 1||-61.8%|
When comparing the S&P 500 with the average of the stock splits over a one-year period, the index clearly is the better performer. One possible reason for this result is that many investors likely bought one or more of these stocks after their split announcement but prior to the actual event, selling shortly thereafter once a profit was in-hand. That's a fine theory, but you'd think that the increased liquidity brought about by the split, along with a cheaper share price, would be enough to drive these stocks even higher. Some have even made the argument that stock splits aren't nearly as popular today because triple-digit stock prices like those at Apple (Nasdaq:AAPL) are a sign of corporate success. Who knows? But it's important to keep in mind that the difference between the index and the splitting-stocks wouldn't be nearly as great if the one major loss from each were removed from the average. In the case of the 2009 splits, the return jumps from 6.8 to 18.8%, and in the 2008 splits, it jumps from negative 4.2% to positive 6.1%. That's quite a difference and something to keep in mind as we look at the two-year returns.
Stock Splits - September 2008 to October 2008
|Company||Stock-Split Date||Split Amount||One-Year Return||Two-Year Return|
|Buckle (NYSE:BKE)||Oct 31/2008||3 for 2||26.7%||26.0%|
|Brown-Forman (NYSE:BF.B)||Oct 28/2008||5 for 4||15.9%||46.4%|
|Graham Corp. (NYSE:GHM)||Oct 7/2008||2 for 1||(15.4%)||(13.3%)|
|Illumina (Nasdaq:ILMN)||Sept 23/2008||2 for 1||(3.0%)||19.0%|
|Integral Systems (Nasdaq:ISYS)||Sept 8/2008||2 for 1||(70.4%)||(68.0%)|
Even with the 68% decline in Integral Systems' stock price over the last two years, the cumulative returns over a two-year period favor the stock splits by 650 basis points. While we will need to follow the 2009 splits through 2011 to determine if there's a pattern, I'm prepared to accept the preliminary hypothesis that stock splits do ultimately lead to higher performance long term. In May, Chinese search engine Baidu (Nasdaq:BIDU) split 10-for-1 and in the first two days following the split, its stock jumped approximately 10%. I don't have a crystal ball but I'm certain its stock will be trading much higher in May 2012.
Personally, I never thought there was anything to stock splits but this small sample makes you wonder why there aren't more splits happening. (We explain what they are, the thinking behind them as well as their results. Check out Understanding Stock Splits.)
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