Will Splitting These Stocks Make Them More Valuable?
May 16th 2012 2:44PM
Updated May 16th 2012 2:48PM
Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, though, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
That's why we pair up stock-split announcements with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think a company's long-term potential is outstanding, and the company is giving off bullish signals, maybe then investors should take notice.
Here are two stocks that recently announced their intention to split their shares.
CAPS Rating (out of 5)
Current Share Price
|Cemig (NYS: CIG)||***||5:4||May 11, 2012||$17.54|
|FMC (NYS: FMC)||***||2:1||May 24, 2012||$103.99|
Don't blindly buy into a split -- you still need to do some research. Use the announcement as a jumping-off point to determine whether its shares are two or three times as good as before.
While the natural gas industry in the U.S. is in a deep state of depression, with prices still trading at historic lows and inventories at historic highs, it's not the same elsewhere in the world, where producers can still command higher prices for their output. Brazilian utility operator Cia Energetica de Minas Gerais, or Cemig, recently acquired natural gas assets from supplier Gasmig and plans to start drilling its own wells because demand is so great. But even those plans could be upset by the tumult in Europe as Greece plans to exit from the eurozone. Global energy prices have weakened in the wake of the recent elections, which heightened worldwide financial risk, and oil prices remained below $95 a barrel.
Yet 97% of the electricity it generates comes from hydroelectric power, which ought to benefit from continued economic expansion. Despite spasms of upheaval elsewhere, Brazil has maintained its position as a stalwart of growth though even there cracks are appearing. The government now believes the economy will expand less than the 4.5% rate previously forecast for this year, perhaps just achieving the 2.7% rate it notched in 2011.
Cemig expects total energy distribution to reach as high as 53.8 terawatts per hour by 2015 and is putting most of its resources into the distribution portion of its capex spending plan.
But what probably attracts most investors to Cemig is its dividend, currently yielding 3.4%. While fellow Brazilian dividend payer Vale (NYS: VALE) may pay more (5.7%), the steady-state nature of the utility is what appeals to CAPS member Porcus, who sees it stable across a number of metrics: "good yield, low p/e, high margin, low PEG, high return on equity."
Add the Brazilian utility to your watchlist to see if it can keep up its expansion even if the country's economy slows as expected.
A special niche
Brazil's economic drive was also evident in an unsuspecting place: the earnings results of chemical manufacturing outfit FMC, which saw its agricultural chemicals division enjoy a 32% jump in revenues as its Latin American segment -- primarily because of a strong finish to Brazil's sugarcane and cotton season -- surged 44% higher over the year-ago period.
Unlike other specialty chemicals makers such as Huntsman (NYS: HUN) or Kronos Worldwide (NYS: KRO) , FMC doesn't gain any benefit from titanium dioxide, which has seen prices soar, resulting in greater profits for the producers. Rather, FMC's specialty is biopolymers that are used in food ingredients used to enhance texture, color, and structure, along with lithium for energy storage systems. Whether we'll see lithium enjoy the runaway pricing TiO2 is currently experiencing, FMC notes supplies of it are tightening and that's having an impact on volumes sold.
With 96% of the more than 400 CAPS members rating FMC thinking it will outperform the broad market indexes, it's clear they believe it has a special inside track to growth moving forward. Add the chemical manufacturing company to the Fool's free portfolio tracker, then let us know on the FMC CAPS page if the potential for higher prices will make it special enough for your portfolio.
Split the difference
Head over to the completely free CAPS service and let us hear what you've got to say about these or any other stocks that you think we should split hairs over. And if you're looking for dividend-paying stocks to balance out your portfolio, check out The Motley Fool's free report "2 Dirt Cheap Stocks With HUGE Dividends." You can be among the first to get analysis of a market leader in payment systems and a high-yielding energy company by accessing this just-released report. Simply click here -- it's free.
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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