A perspective on the value of Stock Splits...
March 9, 1997, Sunday, TWO STAR EDITION
GOOD SIGNS; STOCKS THAT SPLIT USUALLY OUTPERFORM THEIR PEERS
BY: DAVID BARBOZA, N.Y. TIMES NEWS SERVICE
With the Dow Jones industrial average above the 7,000-point level and stock prices at record levels, companies are once again indulging in that old bull market pastime: stock splitting.
Already this year, five Dow stocks - Boeing, Du Pont, Exxon, IBM and Philip Morris - have announced plans to split. And other large companies, like Intel, BankAmerica and Bristol-Myers Squibb, are also scheduling splits in what experts say could be one of the biggest years ever for stock splits.
Although many dismiss stock splits as merely cosmetic, arguing that they fail to increase shareholder value, several studies have shown that shares that have split generally outperform the shares of comparably sized companies in the years after the split.
In other words, while stock splits themselves - which simply lower the price of a stock by dividing those shares already held - are rather insignificant, many say they are a sign that companies think good times are ahead, which means a split could be a signal for investors to buy.
'The evidence suggests that even though the event is meaningless, the market tends to react positively to it,' said David Ikenberry, a professor of finance at Rice University in Houston, who co-wrote a study on stock splits. 'Splits don't cause good news. Good news appears to be motivating splits to occur in the first place.'
Of the 14 companies in the Standard & Poor's 100 - an index of the United States' largest corporations - that had stock splits last year, nine of them easily outperformed the index after they split, by about eight percentage points.
For example, shares of Hewlett-Packard Co., which split 2 for 1 in July, rose 37 percent, compared with 28 percent for the S&P 100 since then. And the stock of Avon Products Inc., which split in June, gained 28 percent, outpacing the S&P 100 gain of 19 percent.
Together, all 14 split stocks outperformed the S&P 100, on average, by nearly 2.5 percentage points last year.
As for the Dow stocks scheduled to split this year, two of them did very well the last time they split.
As of last Monday's close, shares of Philip Morris had gained 203 percent after its stock split in 1989, compared with an increase of 150 percent for the Dow. And Du Pont, which split in 1990, had gained 179 percent, compared with the Dow's 166 percent.
Of course the news is not always positive, as the shares of the two giant soft-drink companies proved after they split last year. The stock of Coca-Cola Co., which split last May, was the S&P 100's best post-split performer, up 40 percent as of last Monday, while the S&P 100 was up 21 percent.
Meanwhile, the stock of Pepsico Inc., which also split in May, was the index's worst-performing splitter. It has gained 0.8 percent since it split.
The history of this year's other Dow splitters also offers some caution. Boeing and Exxon trail the Dow badly since their shares last split. Boeing is up 75 percent since it split in 1990, compared with a 140 percent rise in the Dow, while Exxon is up 112 percent since its 1987 split, compared with the Dow's 170 percent gain.
And IBM - which said it would split its stock in May - has an even more tattered past. The last three times IBM split, its stock lost an average of 45 percent over the next few years. After its last split, in 1979, shares of IBM lost 36 percent in 28 months, falling from $ 75 to $ 48.
But for the most part, experts said that after a large company splits its stock, those shares usually perform very well.
The S&P 100 findings are similar to a study conducted by Ikenberry and Graeme Rankine, a professor of finance at the American Graduate School of International Management in Glendale, Ariz., who studied 1,275 companies that offered 2-for-1 splits between 1975 and 1990.
Their study found that shares that split performed better than shares of similarly sized companies that did not split. The companies they studied generally outperformed their competitors by about eight percentage points in the year after the split and about 12 percentage points over three years, they said.
Thus, while competitors had gains of about 53 percent over three years, shares of companies that had stock splits surged 65 percent.
'That suggests that if you bought a portfolio of split firms, on average, they did better,' Rankine said. |
