The Dow Jones Industrial Average hit a new high on Tuesday, marking a stunning rally since the bottom nearly four years ago. With the market at new highs, you can imagine that there are a lot of stocks at prices much higher than they were a few years ago. Today, I'm going to focus on five stocks that should split their stock now. Not all of these are at new highs, but there are some reasons why I believe they should split now.
International Business Machines (IBM):
IBM is just a few dollars away from its 52-week and all-time high. That has a lot to do with the Dow's rally, since IBM is the largest weighting in the index. However, it's gotten to the point where IBM's weighting is just too much in my opinion. Remember, the Dow is a price weighted index, so IBM with a share price over $200 has a much higher weighting than a stock at say $70.
To show how high the weighting is, let's look at the SPDR Dow Jones Industrial Average ETF (DIA), and its holdings as of Monday. IBM had an 11.15% weighting, meaning it accounts for more than 1/9 of the Dow's move. IBM has a higher weighting than the 3rd and 4th largest components combined, which only accounted for 10.78%. Additionally, the bottom nine components in the index only have a weighting of 10.71%. Microsoft (MSFT) has a higher market cap than IBM, yet Microsoft only accounts for 1.53% of the Dow.
I'm not arguing for IBM to split like 2 for 1 or 3 for 1 and take itself out of the top spot. A 3 for 2 split would work just as well, and would put IBM still around $140. At the same time, the Dow could add a new member, which is the basis for another name on this list. Three of the past four IBM stock splits dating back to 1973 have come in the last week of May, with the other one coming on June 1st. We're approaching that time of the calendar again, so maybe IBM will announce a stock split with its next earnings report in April.
Apple (AAPL):
This one will generate a lot of buzz, because it seems odd that you would split a stock at $431, but no split was announced when we were near $700. Well, it goes back to the name above. I think that you could easily change up the Dow here. IBM could split, and taking out one of the bottom weights opens up a nice slot for Apple. To do that, Apple would need to split, because it trades for more than twice the price that IBM does.
To me, it makes sense to get some fresh blood into the Dow, and think about it this way. Those bottom nine components I mentioned earlier all have weights under 2%. In fact, seven of those are at 1.5% or less, five are under 1.2%, and two are under 0.65%. Unless Bank of America (BAC) or Alcoa (AA) do a reverse split in the near future, their weight on the index will continue to be nonexistent.
Even though Apple has the largest market cap, you don't have to make it the biggest weight in the Dow. It's already the biggest weight in the NASDAQ and S&P 500. If you were to split Apple say 5 or 6 for 1, you could make it have a 4% to 5% weighting, which would still give it some pull in the index.
Additionally, everyone says that Apple has to do something now. The stock has plummeted off its $705 high, and I recently argued that crossing the 2.5% dividend yield should mark a bottom. Everyone, including myself, is arguing for a dividend raise and more stock buybacks, but wouldn't a stock split generate some positive buzz? I think it would.
Google (GOOG):
I recently argued that Google's growth wasn't worth the premium you are paying for it, but it's not just the valuation that concerns me. Over the last roughly 9 months, Google has gone from being a $550 stock to being an $838 stock. We've reached the point where a share of Google almost costs double what a share of Apple does. A few months ago, Google shares traded at about the same dollar value as Apple did.
Everyone is split about the law of large numbers, referring to the fact that more investors would be able to buy Google at $84 instead of $830. I agree with that to a point. However, when it comes to Google, I'm not arguing that Google should be put in the Dow, so I'm not as concerned with its price being around $100. Baidu's (BIDU) 10 for 1 split worked quite well a few years ago, but I don't think Google needs to go that far. Google could split 2 for 1, and still be seen as a "premium" stock that trades for more than $400.
Intuitive Surgical (ISRG):
This name has been one of my personal favorites over the last five years, and it's also been one of the best performers as well. The company has consistently crushed estimates, and is a best of breed pick in the space. Intuitive Surgical has traded as a premium stock, fetching a high valuation for some time now.
Recently, the stock has been hit over concerns of a probe into the da Vinci Surgical System. These concerns caused a late day plunge in the stock, and after a quick pop right back up, the stock is coming back down again. I'm not a healthcare expert, so I can't really comment on whether or not these surgical robots are doing what they are supposed to. However, if these concerns turn out to be true, it could cause some long term damage to this company.
The reason I've chosen to talk about a split for this company is because the stock seems to have a ceiling between $550 and $600. I've provided a one year chart to show how this stock keeps getting knocked down. Every time we rally towards $600, another bearish report comes out. In December, it was the Citron Report. That plunge turned out to be a great opportunity for investors. The company rallied back and then surged after earnings.
(click to enlarge)
(Source: Yahoo! Finance)
In addition to the theory I mentioned above about high priced stocks, there's one other benefit a split in ISRG would see. This benefit is in regards to the company's stock buyback, as a split would make it a bit easier to buy back shares. Think about this following hypothetical example. Let's say the company decides to buy back $3,000 of stock one day. When ISRG trades for $520, they can buy back 5 shares of stock (using $3,000 as a hard limit) for $2,600. That means $400 is left, which isn't used for the buyback and maybe the company doesn't buy that stock back for a while, which hurts the share count. Now let's say the company splits 4 for 1 to $130 a share. At this price, the company buys back 23 shares for a total of $2,990. They've used almost all of that daily limit, and they've bought back 3 extra shares (when accounting for the split). I think that a split for ISRG would not only help the buyback, but help break through the ceiling this stock can't get through, assuming of course the da Vinci system reports are not true.
Mastercard (MA):
I think Mastercard needs to split because investors can get the same thing in Visa (V), but for less than 1/3 of the share price. First, look at the two year chart. It's almost exactly the same.
(click to enlarge)
(Source: Yahoo! Finance)
The second item is my table below showing some key comparisons between the two. The companies have almost identical numbers. Mastercard has slightly higher revenue growth estimates, but Visa has a slightly higher dividend yield. The earnings growth over two years is practically identical, and the valuations are very similar. There's only one difference here, and it's the share price.
*Visa's fiscal year ends in September.
Over the last 9 months, Visa has outperformed Mastercard by about 10%. I really think it has to do with Mastercard trading for so much money. You can buy nearly 3.29 shares of Visa for every share of Mastercard, so I think investors are buying the stock with the lower dollar value. For investors that don't want to tie up $527 a share to buy Mastercard, you can get an identical company essentially for $160, and invest other money elsewhere.
For these reasons, I think Mastercard needs to split, and at least 3 for 1. If Mastercard were to split more than that, it would have a share price below Visa, and I think that would be a positive. Mastercard has done well in recent years, but I think we are getting to the point where investors are happier with the lower priced Visa.
Final Thoughts:
I believe that all five stocks discussed today could benefit from a stock split. Two of these names splitting could help facilitate a change in the Dow, which is probably needed at this point. The other three names would benefit from lower share prices which would allow a broader base of investors to come in. Additionally, the companies on this list that are buying back stock would be able to do it better with a lower share price. Sometimes, when the price gets too high, companies might want to consider a stock split. These five names should consider it.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: Author long AAPL at time of writing, but as stated in previous article, looking to exit position in $440 to $450 range.Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.
Source: http://seekingalpha.com/article/1251501-5-stocks-that-should-split-now?source=feed
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