Every once in a while, when a company is doing well on the market, there is an announcement of a stock split. A stock split means that for each share you own as a shareholder, you will receive additional shares. Most of the time, we see 2:1 split, which means that you will receive an additional share for each share you own already.

What is the real impact of a stock split?

Is it a good thing?

Is it a bad thing?

Is it simply a marketing move?

This is what we are going to look into in this article. Since the market is not stopping on its journey towards new record highs, stock splits may occur in 2014.

How Stock Splits Work

As previously mentioned, the most common reason why a company would perform a stock split is when the stock price reaches a historical high in dollar values. This has nothing to do with the market value of the company but rather the perception retail investors have for a company’s stock price.

The stock split mechanism occurs similar to a dividend payment. There is an announcement made by the company where it outlines the stock split details (e.g. how many shares you will receive for each that you own). The way the stock split is made is usually through a share dividend. This means that upon the dividend date, the shareholder will receive additional shares of the company instead of receiving cash as a usual dividend payment. There is something similar to an ex-dividend date where owners recorded on the specific date will receive the additional shares.

You don’t have to do anything to make it happen. As is the case with a cash dividend, only the fact that you are a shareholder makes you eligible to receive the new shares. Upon the share distribution, the stock price will drop accordingly. For example, if a stock splits 2:1 and was worth $50 before the split, you will receive an additional share and your stock price will drop to $25 each.

As you can see, there is no value added from the stock split per se. The dividend paid per stock will follow the stock split rules accordingly. Here again, no value is created from the split. The good news is that you are not taxed upon a stock split either!

Finally, if you own share certificates in your safe instead of holding shares in a brokerage account do not destroy your physical share certificates. The certificates are still valid and the split will be calculated the day you wish to sell your position. So, you can still hold them for another 10 years and will still receive the right dividend payouts during that period and still make the same money when you sell your certificates later on.

Is a Stock Split a Good Thing?

In order to evaluate if a stock split announcement is good news or bad news for an investor, I’ve taken the example of two well known companies; Google (GOOG) and Coca-Cola (KO).

For example, a company like Google (GOOG) never split its stock. It is currently trading at around $1,060 per share. Another company like Coca-Cola (KO) has split its stocks 11 times over its history and is currently trading at around $40. Do you think Google is worth 26 times more than Coca-Cola? This is what its individual stock price leads you to think. You may be surprised to learn that Google is “only” twice the size of Coca-Cola when comparing market capitalization (354B Vs 178B). This is only to show you how a stock split could play on your perception of the price of the company but has no real impact on its market value.

Then, if it doesn’t change the market value, what does it bring to split the stock?

This is where it gets interesting. Without searching through your memory, can you, by looking only at the following graph, tell me when the latest KO stock split happened?

As you can see, KO has gone up and down several times during the past 5 years. When looking at the graph, it’s virtually impossible to know when the stock split. The date the stock split was August 13^th 2012…when the market value was about the same as today. Therefore, over the past year and a half, KO split didn’t have any impact on its stock value.

When you read the newspaper, some journalist will tell you it enables a better access for retail shareholders. According to what they say, it’s easier for the small investor to own KO shares than to own GOOG since the price is only $40. All right…. Let’s take a look at the *huge* impact that KO recent stock split had on its volume:

As you can see, there is a huge impact on the day the stock was split (that’s the high orange peak). But when you look at the overall stock volume from 2009 to 2013 you notice only one thing; the stock is less traded in volume today than it was back in 2009.

More Accessible to Investors… Really?

There are a lot of theories around how much your minimum investment (in cash or % of your portfolio) should be in a company. I personally like to have a minimum of $1,000 to drop my trading costs below Mutual fund MERs. So with only $1,000, I can’t even buy ONE share of GOOG as I will be short by $60 or so. But since $1,000 is my minimum price, I would just have to wait until I save another $100 in my account to make the trade.

I actually have a real example for you. Take the time to look at my current portfolio. You will notice that I hold only 5 shares of Apple (AAPL). The stock trades around $565 right now. This means my investment worth about $2,825. Is this position better or worse than my 25 shares of Johnson & Johnson (JNJ) that is worth $2,300? Both companies have about the same percentage of my holdings and owning 25 shares of one and 5 shares of the other doesn’t make much difference. If Apple goes up by 10%, I will make another $280. I could have own 50 shares of AAPL trading at $56.50, I would have made the same $280 at the end of the day. So as long as a stock trades under your minimum viable transaction, you can buy a very small amount of shares, it won’t matter!

A Good Marketing Strategy?

Yes…. This is my theory. If the stock split doesn’t affect the company’s value and it doesn’t affect its trading volume, the only thing that it does is to put the company on the front page of the newspaper. Everybody talks about the company splitting shares, blog articles are written and further analyses are made during that period (to determine whether or not it is a good thing for the company…duh!).

I’ve made a quick Google search on “Coca-Cola stock split” and guessed what I found: articles from Bloomberg, Seeking Alpha, Mootley Fool, etc, etc, etc. Besides that? Not much was taken away from this split!

My Take about Stock Splits?

Fairly simple; let people talk about it and invest in sound companies… regardless of their stock price!

What do you think? Are you more inclined to buy a stock with a lower dollar value?

SAVE THE DATE: MONDAY DECEMBER 9^TH – I’M PRE-LAUNCHING MY SPECIAL DIVIDEND PROJECT

I call that a pre-launch since only those who have subscribe to the special dividend project list will receive an email on Monday. I’ve received too many positive emails so far from my readers that I want to make sure to launch my project properly. This is why I’m limiting the access right now. So if you want to be in the know, I think you should subscribe to my special dividend project newsletter.

Now, what’s interesting to read this weekend?

#1 Top 100 Dividend Stocks @ Intelligent Speculator

#2 Very interesting series done @ My Own Advisor where he asked other bloggers What’s in their portfolio. You can read about Dividend Ninja’s and The Passive Income Earner’s perception

#3 Investment books you should read @ Dividend Growth Stock Investing

#4 Read why Dividend Mantra doesn’t compare his portfolio return to the S&P500

#5 How you can protect your portfolio with dividends and options @ Hello Suckers

#6 Dividend Ladder found 3 dividend stocks on sale for Black Friday

#7 Dividend Investing  VS Value Investing @ The Conservative Income Investor

Dividend Stock Analysis

#1 Chevron (CVX) @ Dividend Engineering

#2 Deere (DE) @ Passive Income Pursuit

#3 Becton Dickinson (BDX) @ Dividend Growth Investor

#4 Ventas (VTR) @ Dividend Growth Machine

Last week, there was a huge news story that fell from the sky over Canada. It was an important announcement for any hockey fan North of the border and, believe me, there are many! Last week, Rogers Communications (RCI.B) sealed a $5.2B deal to buy the exclusive rights for all Canadian hockey teams’ games with the NHL. This includes the right to broadcast, on any kind of media, games from the Vancouver Canucks, Calgary Flames, Edmonton Oilers, Ottawa Senators, Toronto Maple Leafs and the Montreal Canadiens. Note that the broadcast of 2 of the 3 richest hockey teams (the Leafs and the Habs) are in the package.

I really like Canadian telecoms because they evolve in a protected market similar to Canadian banks. There are only four big players sharing roughly 85% of the market. Let’s take a deeper look at the transaction and what it really means if you hold any of these stocks.

The Art of Losing a Marketing Asset for Bell

Prior to this deal, Bell had the broadcasting exclusivity. It is important to understand that BCE is making an important effort to diversify its business portfolio lately. After buying 75% (in a joint-venture with Rogers!) of Maple Leaf Sports & Entertainments (MLSE owns the Maple Leafs, the NBA Raptors and the MLS Toronto FC) in 2011, they went for another deal in the entertainment/media business with the purchase of Astral Media this year.

At first, I kind of liked BCE’s strategy of generating revenues outside the phone and mobile environment. We all know the big three (Telus, Rogers and BCE) generate a lot of profit from their mobile branch but we also know that this is also something they can lose pretty fast if another Verizon (VZ) would invade their playground. We saw Rogers, Bell and Telus shares fall by 12%, 12% and 5.6% between June 14^th (when the invasion rumor of VZ was gaining traction) and August 14^th, when VZ finally announced moving its cash towards Vodaphone’s shares in the company buyback.

The reason why BCE didn’t fall as fast as Rogers and Telus is because they were heading towards a direction different than solely mobile.

Now that BCE lost this important contract, they will have to fill a lot of air time for TSN and its Quebec sister RDS with… curling? The NHL broadcasting rights in Canada are probably as important as the NFL rights in the US. This is what BCE lost – a very important marketing asset.

It’s far from being the end of the world though as the transaction looks bigger than it is.

What $5B Really Means for A Company the Size of Rogers or BCE

I love to put numbers into perspective as it gives real meaning to money. I’ve read many reactions last week in regards to this transaction. Most were coming from hockey fans and not shareholders. In fact, all the above mentioned companies barely moved more than the market on that day. Most financial analysts thought it was“insignificant” news. Why is that? After all, I won’t be watching hockey on TSN anymore, I will have to buy Sportsnets channels on my TV!!!

Last year, BCE’s net earnings stood at $8.5B and Rogers at almost $5B. Therefore, a $5B transaction is nothing more than one year of profit for each company. Let’s go further. Let’s say that Rogers generates an additional $100M in profit per year from this transaction; this would represent 2% growth of its current earnings. Nothing to write home about.

As I mentioned previously, the real loss is a marketing play – not a financial one. Starting next year, Rogers will be able to use its WMM (Weapons of Mass Marketing) to offers its products to all hockey fans. Since hockey is very popular in the 18-35 years old arena, it is a perfect market to push mobile and other techno products.

The Question is; Why did BCE let it Go?

Maybe it’s because they didn’t want to compete with an overpriced offer.

Maybe it’s because they have enough on their plate integrating Astral.

Maybe they think they can do like ESPN (Disney’s (DIS) Sport Channel) and become the reference of pre-game and after-game shows. This would keep their stations healthy if they replicate ESPN’s model.

Or maybe they just dropped the ball and went running under their desks to cry.

One thing for sure, this is another reason why I won’t change my shares of Telus for Bell! In fact, for a dividend  growth investor like me, I think Telus is a better choice. Just check how the dividend has increased since 2009 (the year Telus started to grow its dividend consistently):

As you can see, Telus has a “good” habit of raising its dividend by about 10% per year.  When you look at the three companies’ payout ratios, you can see that Telus doesn’t move too fast and they will have enough room to continue going forward:

An interesting play right now could be to look at how Rogers will be able to use its new WMM to gain market share in Canada. One thing is for sure, after this transaction the NHL is the biggest winner and the Canadian telecom market is more hostile than ever to any other foreign companies who wish to enter this market.

Readers, what do you think of this transaction? Did you change your mind toward telecoms companies?

Disclaimer: I own shares of Telus and Disney