You may have heard recently about Coca Cola’s stocks splitting. But what does that really mean? Is it a good or bad thing? Why do stocks split in the first place? Let’s dive in to the matter.
April 2012 – Coca Cola announced it was going to split its stock 2 for 1. This means if you own 100 shares, you are going to have 200 now. At the time they announced the split in April, the stock was trading at $78. Therefore if you owned 100 shares you were worth $7,800. In August 2012, the stock became $39 but if you previously owned 100 shares, you now own 200 shares. You’re still worth $7800. So why split a company’s stock? Most stock splits occur when companies feel positive about their future. Companies split their stock when they feel the price is too high and is keeping investors from buying their stock. In Coca Cola’s case the stock was $78/share at the announcement and will trade around $39 at the date of split. They also may have looked at stocks that are similar to them in the S&P 500. At the time of the split announcement the average price of a stock in the S&P was $56/shr. Coke was almost 40% higher than other stocks similar to them.
Some history: In 1919 - Cocoa Cola came out in its IPO at $40/share. This is the 10th split since 1919. If you have held the stock since then and reinvested all dividends and received all the stock splits your $40 stock would be worth $10,000,000. Not a bad long term investment.
Be careful if you hear about a reverse stock split. Stock trading at $1/share and you own 100 shares. The company announces a 1:10 reverse split. You now own 10 shares at a price of $10/shr. As you can see in this example and most reverse splits they are done on low priced stocks. Investors look unfavorable on low priced stocks, sometimes called penny stocks, because of increased risk either real or perceived. Also many mutual funds and large pension funds can not invest in stocks priced less than $5/shr.
Stock splits usually are a positive but results still reflect a company’s earnings now and in the future. Stock splits should not be the only reason to invest in a particular company but it could be positive among other positives. Reverse stock splits are usually a sign of negatives, but again it should be part of your research.Give your advisor a call when you hear about a stock split to get details about the split and the possible positives or negatives. For more on stock splits or any financial advice visit www.dlgwealthmanagement.com or call 518 348-0060.
