By Bob O’Brien
Stock splits are one of the implements that corporations keep in their tool kits. Akin to dividends. Or buybacks. Only … less so. Stock splits are ephemera, like dotting an “I” with a smiley face. They make the message seem a little more companionable, without changing the meaning of the words.
Corporate management has responded to this reality affirmatively. “There are a lot more companies comfortable with stock prices north of $100 a share than would have been the case 10 years ago,” David Ikenberry of the Leeds School of Business at the University of Colorado Boulder, said in a recent interview. “And it’s hard to see that that ground is shifting.”
Stocks are like wine prices at a restaurant. Thirty dollar cabernets are just right when the customer is putting down a personal credit card. That $100 bottle is the province of corporate cards. So it is with stocks: cheap stocks appeal to individual investors, pricier ones — approaching or eclipsing triple digits — to institutional investors. And everybody knows that the playing field has tilted in favor of those institutional investors the last several years.
“Institutional investors are indifferent to stock splits,” Scott Rostan, founder and CEO of Training The Street, a provider of training services for investment professionals. “From a pure finance perspective, stock splits don’t do anything.”
Nevertheless, Ikenberry’s own research, dating to 2003, found that stocks that companies executing stock splits outperform the market by 8% in the year after the split is effected, and by 12% over a three year period.
What’s this — the power of positive thinking?
“While stock splits in themselves do not add economic value to a company, there are a few behavioral benefits that companies can obtain from stock splits,” Prof. William Mahnic of the Department of Banking & Finance at Case Western Reserve University in Cleveland said recently.
The first is an improvement in liquidity. Cheaper stocks are more affordable for individual investors. In theory that translates into increased demand. Which, in turn, should drive price appreciation.
The second is the dog whistle effect: stock splits are management’s way to signal to investors that fundamentals are robust, and confirm the rationale for investing in the company.
There’s a certain – though utterly unfounded – feeling of accomplishment associated with the bigger share count associated with a post-split investment. “People rationalize that they own a larger number of shares so their shareholdings have increased, when, in fact, their percentage of ownership is exactly the same,” Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa., said recently.
Investors also have a different sense of anticipation associated with lower priced stocks. “There’s an illusion associated with higher dollar stocks,” Ikenberry said. Somebody holding a $30 stock might have a higher expectation that the shares could climb to $60 than would be the case for someone with a $300 stock anticipating those shares getting to $600.
All this being said, it comes down to the reality that stock splits are essentially fairy dust. A little corporate legerdemain. “A company is worth what a company is worth,” Rostan said. “And if a company announces a 2-for-1 split, the market cap is still the same.”
Nevertheless, guessing what corporate entity is on the cusp of a stock split is a fun kind of Wall Street game of charades. We’ve crafted a roster of a handful of companies with a few characteristics–high prices (i.e., $100 minimum), household names (mostly), with a track record of stock splits in their heritage–and offer them here as … let’s call them candidates, rather than suggestions.
AutoZone (AZO) could handily execute some kind of eye-popping stock split and still be a candidate for … another stock split. Think of this: if the $805 stock split on a 6-to-1 basis, its shares would still trade for $135. Meaning, of course, that it would still be part of the triple-digit stock price fraternity. The retailer of auto parts and accessories has been benefiting from the tremendous improvements in the cars rolling off retailers’ lots, allowing car owners to hang onto their vehicles for longer, while still needing antifreeze, new floor mats and even a new pair of fuzzy dice to hang on the rearview mirror. Don’t hold your breath on an AZO stock split, though: the company hasn’t executed one in 22 years. While it’s notably penurious with dividend payments — its dividend yield is zero — it’s a thoroughbred at executing on share buybacks. A company with a market cap of about $23 billion has repurchased $16 billion of its stock since 1998, suggesting that it has a firm belief in the best way to return capital to its shareholders.
Casey’s General Store (CASY) would seem a likely candidate to cogitate on a stock split. The operator of convenience stores and gas pumping businesses would seem to be about as consumer-facing a retail brand as Wall Street has created. Customers might be used to the relatively high prices they pay for a half gallon of milk, a box of doughnuts and whatever the retailer charges in the beer aisle. It’s just not as clear that investors would be as sanguine about coughing up $125 for a share of stock. Daily trading volume comes in short of half a million shares a day, about one-fifth of what a retailer like Costco (COST) does in a trading session. The company, which operates nearly 2000 stores, is conversant with splits, having executed four of them in its history, though the last one dates to 1998.
FedEx (FDX) , which trades at $192 a share, would seem a ripe candidate for a split, as shares have outperformed the market, up 28% year to date. By now you’re probably living someplace where the art on your walls consists of cave paintings if you haven’t taken delivery of one of the company’s distinctive boxes. At the moment, it’s not exactly lavishing its stockholders with plump payouts – its yield is south of 1%, meaning it’s not a dividend aristocrat. So would a split be a nice “attaboy” for those shareholders who have lived with the company’s leverage to the economy? Well, don’t hold your breath. FedEx has a history of splits, having executed five in its time as a public company, though the last one was 17 years ago. And at an investor meeting in 2012, a participant asked point blank: can we expect to see a stock split? Management’s pithy answer: “No.”
Biglari Holdings (BH) may not be familiar enough to many investors to prompt questions of a stock split. But its stock changes hands at $480 a share. And yet the stock is relatively cheap for its industry, trading at just 15 times its free cash flow. You may not have perused many analysts reports on the company: there’s only one sell side analyst publishing on the name. (C.L. King, which has a “buy” rating.) But you’ve heard of some of its operations: it controls the Steak ‘N Shake restaurant chain and associated properties. It’s also holder of 20% of the shares of Cracker Barrel Old Country Stores (CBRL) . Some followers even suggest it’s a backdoor way to build a position in the wonderfully performing Cracker Barrel at a discount to buying the latter’s stock. But a split? Not in the cards unless the company pretties up its operating performance. It’s third quarter earnings declined 50% over the year ago level. And there are concerns that the business, basically the investment arm of Sandar Biglari, has attracted the criticisms of activists who say the principal shareholder thinks of himself rather than his fellow shareholders. Warren Buffett he’s not (despite the intimations that the “BH” ticker symbol is a sly nod to Berkshire Hathaway (BRK.A) ). And Biglari himself has a big enough chunk of the float — reportedly 49% — to effectively thwart any initiatives he doesn’t embrace.
Finally, look at Mastercard (MA) . The stock is back to trading in triple-digit territory once again, at $105 a share, buoyed by signs that holiday transaction activity has been robust. Management isn’t unfamiliar with the gymnastics of a stock split: recall that just two years ago, when the stock was trading at $783, Mastercard executed a 10-for-1 stock split, while, at the same time, goosed its dividend payouts by 83%. We’re about to anniversary that January 2015 initiative, and shareholders, even having already been nicely rewarded by the 1000% 10-year returns on the stock, could be clamoring for another swipe of the plastic.