Just do it.
CBS Inc. did it. Ford Motor Co. did it. So did Harley-Davidson, St. Paul Cos., Microsoft Inc., McDonald's Corp., Motorola Inc., General Electric Co., Capitol Cities/ABC and Caterpillar Inc.
All of those companies announced stock splits this year, a period in which selected companies have seen dramatic rises in corporate earnings and stock prices even though the overall market is up only modestly. While an investor receives additional shares when a stock splits, his proportionate ownership of the company remains unchanged.
The stock may split 2-for-1, 3-for-2, 5-for-1, or whatever. Yet his holdings aren't worth one penny more than they were before the split. He simply winds up owning more shares of a lower-priced stock.
Despite that harsh reality, stock splits nonetheless feel good. Really good. Investors love them and companies love announcing them. As a result, the number of stock splits this year is expected to exceed the 142 recorded last year. The record was 225 stock splits back in 1983.
"Stock splits have always been a puzzlement to academic researchers, since you don't create any value when you split a stock," mused Marshall Blume, professor of finance at the Wharton School of the University of Pennsylvania. "If you have a share worth $100, they give you another piece of paper that says you have another share, but you still have only $100 divided over two $50 stocks."
Even Wall Street has its doubts.
"To be honest with you, stock splits baffle me because they just increase paperwork, and having 200 shares rather than 100 shares doesn't do anything and you are not better off," added Richard Bernstein, manager of quantitative analysis for Merrill Lynch & Co. "It's much more important to look at growth and earnings, cash flow and valuation of the stock than whether or not it is likely to split."
Most popular reasons for a stock split, according to a study by the New York Stock Exchange, are a company's desires to achieve a more popular price level, broaden share ownership and increase the liquidity of the stock. Less important objectives are alignment of stock prices with those of competitors and enabling new financings or mergers.
"A stock split indicates a management is very bullish on its prospects and earnings," said Joe Tigue, managing editor of Standard & Poor's The Outlook newsletter, which has an annual subscription of $289 for 48 issues and whose toll-free number is (800) 852-1641. "Earnings have been favorable this year and should continue to be favorable in the fourth quarter."
A split does provide some good news, not only to small investors interested in buying at the new lower price but to existing shareholders as well. That's because the split makes the stock more popular, triggering at least a temporary rise in price in the marketplace.
"Whenever a split is announced, there's generally a pop in the stock price, though that may be attributed to the fact a split usually is accompanied with a dividend increase," noted Charles Carlson, editor of the Dow Theory Forecasts newsletter, which has an annual subscription of $233 for 52 issues available from 7412 Calumet Ave., Hammond, Ind. 46324-2692. "However, as a rule, the stock tends to tail off three to six months after the split."
Among a number of stocks that are likely candidates for splits, according to The Outlook, are Aluminum Co. of America, American International Group, Atlantic Richfield, Chrysler Corp., Chubb Corp., CSX Corp., Dow Chemical, Emerson Electric, McDonnell Douglas, Mobil Corp., News Corp., Norfolk Southern, Roadway Services, Shell Transport & Trading, Textron, TRW Inc. and Warner-Lambert.
Some stocks that have split this year and are considered reasonably priced and particularly attractive by Dow Theory Forecasts include AlliedSignal, GE, McDonald's and Minnesota Mining & Manufacturing.
Another side effect of strong earnings is a boost in dividends. That's a positive for income investors that provokes no debate whatsoever among the experts.
Mr. Bernstein of Merrill Lynch expects dividends are likely to be ,, boosted in the revived industries of chemicals, aluminum, steel, machinery manufacturing and banking. Mr. Blume of the Wharton School notes that a dividend increase is a sign that management believes it can maintain a higher level of dividend in the future, "which is a good sign."