3 Stock Splits that Could Make Big Returns for Investors
Are you looking for stocks with great growth prospects? A good place to begin your search is with companies that are splitting their stock. When a company's outlook is improving and the share price is climbing, management often uses stock splits to lower the price and make shares more attractive and affordable for small investors.
For example, investors may hesitate to purchase a stock trading at $100 a share, but be more inclined to buy after a two-for-one split that drops the price to $50 a share.
A stock split by itself doesn't increase shareholder wealth, because the company's assets, book value and earnings remain the same. In fact, stock splits force the share price to drop initially because of dilution associated with creating more shares. The situation is similar to cutting a pie. Whether it's sliced into six pieces or twenty pieces, the pie's overall size is the same. After a stock split, investors have more shares, but their overall stake in the company doesn't change.
Although a stock split doesn't change the value of a company, many investors see splits as a positive signal that earnings are improving. Academic studies have found a positive relationship between stock splits and a company's future earnings growth as well as cash dividend increases. In one study, researchers looked at hundreds of companies splitting their stock and found that 66% of these firms either raised cash dividends at the time the split was announced or for subsequent dividend payments.
Many high profile companies, including well-known names like Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MFST), were frequent stock-splitters during their rapid growth years, so there is definitely an aura of success surrounding companies that split their stock. And that aura alone often translates into additional gains for a stock.
Here are three companies that are boosting earnings and splitting their stock.
1. CSX Corp. (NYSE: CSX)
Split info: 3-for-1
Freight carrier CSX owns 4,000 locomotives and 21,000 miles of track serving 23 states east of the Mississippi River and parts of Canada. CSX and other rail carriers benefit from rising energy costs, since high gas prices make rail transport an attractive alternative to trucking.
First-quarter 2011 results show CSX has been quick to capitalize on its improving business opportunities. The company's revenue rose 13% and earnings jumped 36% compared to one year ago. CSX expects growth averaging 18% to 20% a year for the next five years. In the past two years, the company's share price has more than doubled.
Although the current dividend yield is modest at 1.9%, CSX has raised its payout sharply in recent years. Dividends have increased 35% in the past five years, and in May the company announced a 3-for-1 stock split, a 38% hike in quarterly dividends to a $0.48 annualized rate, along with a $2 billion share repurchase program. The dividend payout is modest at just 23% of earnings, which leaves plenty of room for dividend growth.
2. Assisted Living Concepts (NYSE: ALC)
Split info: 2-for-1
Assisted Living Concepts is the fourth-largest provider of assisted living services in the United States. The company operates 211 senior living residences across 20 states. Occupancy rates for company facilities are rising steadily, and the outlook for future gains is strong because of America's growing senior population. This aging trend is well-established, with the number of elderly Americans projected to grow by 8.9 million during the next 15 years.
Assisted Living shares have climbed 130% in the past two years. During this year's first quarter, Assisted Living grew net income by 39% through acquisitions, rate hikes and more private-pay residents. The company announced a two-for-one stock split in May and initiated a quarterly cash dividend of $0.10 per share. The $0.40 annualized dividend translates to a yield of 2.4%. With payout at just 25%, a future dividend increase is easily affordable.
3. Gorman-Rupp (AMEX: GRC)
Split info: 5-for-4
Gorman-Rupp manufactures pumps and related devices for industrial and agricultural applications. By cutting costs and upgrading products last year, Gorman-Rupp effectively positioned itself to accelerate earnings growth as demand for its products recovers. Gorman-Rupp's share price is up 58% from year-ago levels, and the company reported 28% sales growth and 58% earnings gains in this year's first quarter. Gorman-Rupp has a record backlog of pump orders, and analysts forecast yearly growth of about 19% during the next five years, compared with just 4% yearly growth in the previous five years.
In tandem with first-quarter results, Gorman-Rupp declared a five-for-four stock split and raised the cash dividend by 7%, to a $0.36 annualized rate. This latest dividend increase marks 38 straight years of dividend growth. Although the yield is modest at just 1.1%, Gorman-Rupp signals confidence in a brighter future with the stock split. Higher earnings growth and a low 23% payout makes dividend hikes likely as the economy picks up steam.
Action to take--> Conservative investors should like Assisted Living Concepts, which is positioned for reliable long-term growth because of America's aging population. CSX and Gorman Rupp are more suitable for aggressive investors, who like cyclical plays that offer quick gains.
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StreetAuthority LLC does not hold positions in any securities mentioned in this article.