What a Coke stock split would mean for investors
You might be able to play the move for a profit -- if you time it right.
By InvestorPlace Apr 25, 2012 12:07PM
By Jeff Reeves
Coca-Cola (KO) is proposing its first stock split in 16 years. Once executed, the move would cut the soft drink giant's share price in half and double the number of shares outstanding on Wall Street.
Will this change your investment? No -- 100 shares at $80 is worth the same as $200 shares at $40.
But what it could change is your strategy. Because historically. Companies have some nice pop immediately after a stock split, so Coke could be a buy before this split takes place.
First, let’s talk details on the split. Coca-Cola began trading in 1919. Since then, the stock has been split only 10 times. Companies split stocks when they think their share price has gotten too expensive, and the move will bring shares down to the $40 range instead of around $80 currently.
If approved, Coke's split would increase the number of its shares to 11.2 billion from 5.6 billion. If approved, the split will give shareholders one additional share of stock for each share held. The split will take place in early August once the OK comes through in July.
But here’s the most interesting part: Typically investors bid up shares of a company after a stock split. So if you don’t own shares yet, you may want to consider buying Coke in July or August right before the split.
Consider that in January 2010, Warren Buffett’s iconic Berkshire Hathaway (BRK.B 0.00%) split its baby B shares 50 for 1 to bring them down from $3,500 per share to around $70. In the first 30 minutes of trading after the split, B shares of Berkshire leaped 5%.
In May 2010, Chinese Internet stock Baidu (BIDU 0.00%) split 10-to-1 to bring its shares down to earth from the $600 level. Forgetting the “drop” in share prices due to the split, the value of Baidu shares jumped 8% on no news.
Oh, and I guess its worth pointing out that the last time Coke split 2 for 1 in 1996, shares popped 2.5% in the first day of trading and ran up 13% across the next 10 trading days.
When a big stock with a big brand splits, it pops. Maybe it’s because investors didn’t pay attention to the news and think they are buying a dip. Maybe it’s because some computer trading isn’t adjusted and triggers a buy for the same reason. Maybe it’s because smaller investors afraid of high-priced stocks are finally enticed into buying.
Honestly, I have no idea why it happens -- the point is that it frequently does happen.
Let me be crystal clear: A stock split doesn’t change a thing other than divide the share price in two and double the shares outstanding. Coke will go from almost $80 per share to almost $40 per share, and the number of shares on the market will increase from roughly 2.26 billion to 4.52 billion.
If you have 100 shares of Coke at $80 worth $8,000, after the split you will have 200 shares of Coke at $40 -- still worth $8,000.
That’s it. Profits won’t change. Revenue won’t change. The price of Coke at the grocery store won’t change. The budget for advertising won’t change.
But for some reason, stocks usually pop after a split.
I would never advocating simply buying a stock to play this phenomenon. But there are a host of reasons to buy Coca-Cola regardless of the split. It’s a bulletproof brand, it reported strong Q1 earnings, it boasts a 2.7% dividend yield and is the largest holding by Buffett and Berkshire Hathaway.
You could do worse than own Coke right now -- especially considering the history of how stocks run up after a split.
Jeff Reeves is the editor of InvestorPlace.com, and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.
Disclosure: I am long KO.
Shareholders of the Coca-Cola Company (KO) approved a 2-for-1 stock split back on July 10, 2012, and the split is scheduled to occur on or about August 10. It is the first stock split in the past 16 years and the 11th in KO's 92-year history. What does this mean for the common shareholder though? A 2-for-1 stock split gives current shareholders double the number of shares but halves the share price. So in other words, the investment retains the same dollar amount. The dividend is also cut in half. Many investors see KO as a dividend growth stock. Over the past five years, the dividend has increased 50% to $0.51 per share per quarter (pre-split). After the split, the dividend will be $0.255 per share per quarter, which will still give the stock approximately a 2.5% yield. Since 2000, the company has increased its dividend payments approximately 10% per year, increasing the quarterly dividend rate 200% from $0.17 per share.
From a dividend standpoint, KO continues to be an extremely safe investment with more than $14 billion of cash and equivalents on the balance sheet as of the end of the second quarter. During the first six months of 2012, KO repurchased 34.6 million outstanding shares for an aggregate cost of $2.53 billion. Following the stock split, management should continue to be aggressive with respect to purchasing shares.
KO has surpassed the Street's earnings per share expectations in each of the past four quarters, and still has room to grow. Stocks historically see a stock split as a positive as it allows "smaller" investors to put their money to work. I like KO much more than PepsiCo (PEP) on its growth overseas and its relative strength in North America, which still accounts for 44% of total revenue. During the second quarter of 2012, only the European segment saw a revenue and volume decline compared with the second quarter of 2011. The Pacific and Eurasia/Africa segments showed strong revenue growth (+7.4% and +4.5%, respectively) and volume growth (+8.0% and +12.0%, respectively) as well.
The stock is off its highs of the year (not much), but I do view any weakness in the stock as a buying opportunity. I would wait until after the stock splits as the record date (similar to the ex-dividend date) has passed so new shares will be not distributed to new shareholders.
About the author: David Silver
Coke To Split: Should The Dow Change Its Components?
July 11, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
On Tuesday morning, Coca-Cola (KO) announced a 2 for 1 stock split, the 11th split in company history and the first in 16 years. The number of authorized shares will double from 5.6 billion to 11.2 billion. As per the press release:
The record date for the stock split is expected to be July 27, 2012, with new shares expected to be distributed on or about Aug. 10, 2012. Each shareowner of record on the close of business on the record date will receive one additional share of common stock for each share held.
Coca-Cola has been a public company since 1919 and the first split was enacted in 1927. According to the company, if all dividends were reinvested annually, one share of the company's stock purchased for $40 in 1919 would be worth roughly $10.3 million today. It has been a great investment over time.
The stock split is nice, but the more interesting decision won't be made by the Coca-Cola company. As many investors now, Coca-Cola is one of the components of the Dow Jones Industrial Average (DIA). As per the history, the Dow Jones Industrial Average started trading in 1896. The complication here is that the Dow is a price weighted index, meaning that the Dow's value is calculated based on the share prices of its components, not their market caps like most other indexes. To calculate the Dow's value, the current prices of the 30 components are added, then divided by the Dow divisor.
The divisor is constantly changed when you get things like stock splits, so the Dow is going to need an update to the divisor when Coca-Cola splits. If the divisor was not updated, the index would lose value because Coca-Cola's share price has dropped. Here's an example of the divisor in theory, taken from the above linked history article.
To demonstrate how this use of the divisor works, we will create a mock index, the Investopedia Mock Average (IMA). The IMA is composed of 10 stocks, which total $1,000 when their stock prices are added together. The IMA quoted in the media is therefore 100 ($1,000/10). Note that the divisor in our example is 10.Now, let's say that one of the stocks in the IMA average trades at $100 but undergoes a 2-for-1 split, reducing its stock price to $50. If our divisor remains unchanged, the calculation for the average would give us 95 ($950/10). This would not be accurate because the stock split merely changed the price, not the value of the company. To compensate for the effects of the split, we have to adjust the divisor downward to 9.5. This way, the index remains at 100 ($950/9.5) and more accurately reflects the value of the stock in the average.
So what am I getting to? Well, for a few years now, there has been a crowd arguing that the Dow should change its components, as certain components have a much higher weighting due to their much higher prices. For example, as of June 29th (pdf), IBM (IBM), the most expensive stock in the index, had a weight of 11.49%. The next highest was Chevron (CVX) at 6.2%, and so on. Exxon Mobil, which has the largest market cap of the 30 stocks, has just a 5% weighting.
As of that June 29th update, the top 10 Dow components (in terms of highest prices), had a 55.47% weighting in the index. So 1/3 of the index controls more than half of the movement. Wal-Mart (WMT) is the 10th largest weighting at 4.1% and has a stock price around $72. Now imagine what the weighting of Bank of America (BAC) is with its price at just $7.48. Alcoa (AA) is in a similar place trading at just $8.40.
So maybe while they are changing the divisor again, it is time to change some of the components. The Dow Jones Industrial Average's stated objective is "To represent large and well-known U.S. companies. Covers all industries with the exception of Transportation and Utilities." So who do you take out, and who gets put in?
Bank of America and Alcoa have been named by many to be replaced because of their low prices. But I don't think you can take out Bank of America because it really represents the Dow, as a well-known U.S. company. Perhaps Bank of America should reverse split its stock and then have the Dow divisor change, which could boost its weighting.
The second theory I have heard is to replace Hewlett-Packard (HPQ) with Apple (AAPL). Hewlett-Packard has been struggling as a computer company in recent years and Apple is the biggest U.S. company by market cap. Apple certainly fits in the "well-known" category. The problem at this time is that with Apple trading at more than $600, you would almost have to force Apple to split its stock, otherwise the weighting would be just too high. I'm not sure that Apple wants to split right now, as the image of a high-priced, or premium stock, goes along with its premium products.
At this point, I don't see a logical change to the Dow, but I think that the Coca-Cola split does provide a good opportunity to do it. Why keep changing the divisor when you can do this all at once? I'm curious to hear your thoughts, and also to hear what you think should be replaced in the Dow and what should be put in.
About the author: Bill Maurer
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