Should These Companies Split Their Shares?
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Some companies are frequent issuers of stock dividends, new shares of stock designed to create more shares at a lower price point.
Studies have confirmed that a normal stock split can increase shareholder value by creating more liquidity and establishing a “trading band” for their share prices.
Autozone (NYSE: AZO) is one of the most expensive stocks at a per-share price of more than $430. The company's high share price comes after a multi-year rally for the car parts chain. The company found abnormal success in the last few years, benefiting from a new American trend of repairing, not replacing, an aging automobile.
The company's high share price may be keeping its valuation lower than it should be. Only 226,000 shares trade hands on an average trading day, which is about $100,000,000 per day, or 1/160th of its total market cap. This makes a relatively large company fairly illiquid for large funds that want to hold the stock.
As Autozone is a serial buyer of its own stock, the company's diluted share count fell precipitously from 64 million shares in 2008 to 37 million shares as of the last quarterly report. If Autozone continues its campaign to redirect profits into repurchases, liquidity will continue to dry up.
The case for a one-time 10 for 1 stock split may help investors realize a higher valuation. This fast-growing specialty retailer and wholesaler sells for a forward multiple of 13.5 times earnings, which is remarkably low compared to Home Depot, a specialty retailer selling for 20 times earnings. Both names are known for their excellent capital allocation, but Autozone's high per-share price and low liquidity in the common stock and stock options may keep buyers out of the name.
A higher dividend and share repurchase hasn't kept Apple (NASDAQ: AAPL) from a 22% slide since the beginning of the year. What looked like the growth stock of the century is seeing falling expectations from Wall Street as smartphone penetration reaches a limit and its customers' upgrade cycles slow.
Apple needs something to keep it from becoming the next falling tech name. Fellow technology companies Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC) have seen their share prices trade in a tight band as they convert from fast-growing names to slow-growth, dividend-paying stocks.
A split may be in order. Apple shares traded higher on rumors of a stock split earlier this year.
Splitting the company's shares would allow for more retail shareholders to own the name, as well as a more liquid and available options market. At $400+ per share, options three and six months in the future are pricey for retail investors.
A 10 for 1 stock split could bring the company back into the hands of retail investors who want exposure to dividend-paying technology companies. Apple trades at multiples near Microsoft and Intel, and at a nearly-equal dividend yield. Slashing the share price with a stock split could encourage retail investors in Microsoft and Intel to make a move over to Apple.
A final world on stock splits
Stock splits do not change the underlying value of the business, but they can encourage the market to find a more appropriate value for the stock. Autozone and Apple have high share prices which can constrain liquidity and participation. If at any point a select group of investors are priced out of the market, the stock doesn't get the demand it deserves, which can crimp valuations.
Autozone and Apple are excellent candidates for a stock split. Autozone could encourage more liquidity and institutional participation while Apple could tap into retail dividend focused investors to create more shareholder value.
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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!