thanks to the timely upgrade by Sandler. Today the stock went ex-dividend for the 5% stock split. The stock is now trading where it was yesterday, so all of us are getting 5% more shares and the price has not been adjusted down by the corresponding 5%, reflecting the split.
You've got it esqchef,
If Worldcom and ENRON did more splits they would still be high fliers today.
Warren Buffet has lost millions of dollars because he refuses to split his stock.
You should be willing to pay a lot more for earnings for stocks that split.
Two ten dollar bills are worth more then a twenty.
Hell of an acacemic discussion!
I am not a "money" guy, just someone who has had this stock since VNB bought Fair Lawn State Bank. To the average guy like me, splits/stock dividends work like this:
You get more stock. The price on this one never seems to stray too far in either direction. So if the stock is trading at say $24.00, and I get some more shares via a split or dividend, and the stock continues to stay at about $24.00, I feel like I am ahead.
Additionally, I don't trade this stock, so the additions along the way will help with the capital gains when it finally sells.
No way! By your logic, all Company B has to do is split 4 for 1 and it will instantly be worth 53 million more in the market since at that time, it will have identical number of shares and earnings as Company A. So why not split 10 for 1 after those five years and pick up even more "value?"
I'll make one last effort with a "fable".
Company A and Company B are identical in every respect. The same everything - same buildings, products, earnings, expenses, market cap, yada yada. Each has a million shares outstanding. Each has EPS of $2.50 with a PE of 20. Each trades for $50 until Company A declares a 2 for 1 split.
The split gooses the stock price by ??? I'll use 2%, so "A" is trading at $25.50 for a gain of $1 over Stock B. The PE of A is a little higher at 20.4.
In five years both companies double their earnings. B is making $5 bucks a share, A makes $2.50. The B stock price has almost doubled to $98. The price makes the stock unattractive to many investors. Company A has also doubled the profits and the price doubled to $51. Time for another spilt to $25.50. The split is good for a 2% premium so A's stock rises to 26.01.
Company A and B are still equal in terms of expenses, profits, products, etc. But Company A has had a better return because of splits. While "B" is selling for $98 bucks, four shares of "A" are worth 104.04.
Business is good and profits double again. B's price almost doubles at$194, but the high price scares many investors away. But company A's price goes up in equal measure to the profit growth. At $52.02 A splits again to 26.01, and the split added value of 2% boosts the price to 26.53. Eight shares of A are worth $212.24.
Business is great and profits double again. B's price almost doubles at$380, but the high price continues to scare investors away. But company A's price goes up in equal measure to the profit growth. At $53.06 A splits again to 26.53, and the split adds extra value of 2% and boosts the price to 27.06. Sixteen shares of "A" are worth $432.98.
B has a PE of 19.0, while A has a PE of 21.65.
Even though you can't tell one company from the other, B has a market cap of 380 million, while A has a market cap of almost 433 million.
Is there a moral to the story?
By virtue of nothing more then a few splits, Company A provided a significantly better return to the shareholders and by splits alone they produced over $53 million in market cap value.
How about another question? If you were going to buy one of these companies which one would it be. The same everything - same buildings, products, earnings, expenses, same model corporate jet, yada yada. But of course company A is worth every penny of the 53 million extra because of the splits! You'd have to be a fool to buy company B.
Lafong, I was about to reply to esqchef but decided discretion was the better part of valor. He just about emasculated every kind of argument I made about the value of splits. And I trust we all use splits as synonomous with stock dividends.
Let me argue the point some more. There is value which can be calculated and described as intrinsic value, i.e. book value determined by dividing equity by shares O/S. That book value is real (intrinsic) and it is many times modified to reflect the differnece between "stated" book and tangible book, to account for the value of intangible assets.
Are we agreed so far? If we are in agreement then we could both stop here. But that book value is not the entire story in my opinion.
The dynamics of the market place do have an effect on market value. Certainly, to the degree that buyers enter the market for a given stock as the result of splits is a positive, however small that influence might be. In the case of Valley and many others the dividend is increased on a dollars and cents basis, such that the shareholder benefits in greater earnings from the increased shares. I think I have seen you
refer to this "legacy" of VLY in some of your posts, referring to it as a steady, bread and butter kind of company.
I'm with you with what I refer to as intrinsic value. but disagree that splits don't enhance my shareholder value based on market price, over the years, because of the dynamics of the market place.
But I will put it to bed after this one.
I respectfully disagree with your theory that price goes up because the lower price is more affordable after a split.
You are correct that some individual investors will will buy at a lower price. But these investors are mere nits and fleas and make no difference. Its the big money (funds) that moves the prices. Someone out there is buying Berkshire Hathaway.
Verity says: "I like splits and I do believe they enhance the MARKET VALUE of my investment."
The ony thing that splits do is increase the total shares, decrease the price and increase the trading volume. If splits inreased market value, the stock should split two (how aobut three or four or even more) for one every couple of months. And then Market value would just skyrocket if you are correct. Would seem to be an easy strategy for corporations to follow to keep increasing market value.