What a Coke stock split would mean for investors
You might be able to play the move for a profit -- if you time it right.
By Jeff Reeves
Coca-Cola (KO) is proposing its first stock split in 16 years. Once executed, the move would cut the soft drink giant's share price in half and double the number of shares outstanding on Wall Street.
Will this change your investment? No -- 100 shares at $80 is worth the same as $200 shares at $40.
But what it could change is your strategy. Because historically. Companies have some nice pop immediately after a stock split, so Coke could be a buy before this split takes place.
First, let’s talk details on the split. Coca-Cola began trading in 1919. Since then, the stock has been split only 10 times. Companies split stocks when they think their share price has gotten too expensive, and the move will bring shares down to the $40 range instead of around $80 currently.
If approved, Coke's split would increase the number of its shares to 11.2 billion from 5.6 billion. If approved, the split will give shareholders one additional share of stock for each share held. The split will take place in early August once the OK comes through in July.
But here’s the most interesting part: Typically investors bid up shares of a company after a stock split. So if you don’t own shares yet, you may want to consider buying Coke in July or August right before the split.
Consider that in January 2010, Warren Buffett’s iconic Berkshire Hathaway (BRK.B) split its baby B shares 50 for 1 to bring them down from $3,500 per share to around $70. In the first 30 minutes of trading after the split, B shares of Berkshire leaped 5%.
In May 2010, Chinese Internet stock Baidu (BIDU) split 10-to-1 to bring its shares down to earth from the $600 level. Forgetting the “drop” in share prices due to the split, the value of Baidu shares jumped 8% on no news.
Oh, and I guess its worth pointing out that the last time Coke split 2 for 1 in 1996, shares popped 2.5% in the first day of trading and ran up 13% across the next 10 trading days.
When a big stock with a big brand splits, it pops. Maybe it’s because investors didn’t pay attention to the news and think they are buying a dip. Maybe it’s because some computer trading isn’t adjusted and triggers a buy for the same reason. Maybe it’s because smaller investors afraid of high-priced stocks are finally enticed into buying.
Honestly, I have no idea why it happens -- the point is that it frequently does happen.
Let me be crystal clear: A stock split doesn’t change a thing other than divide the share price in two and double the shares outstanding. Coke will go from almost $80 per share to almost $40 per share, and the number of shares on the market will increase from roughly 2.26 billion to 4.52 billion.
If you have 100 shares of Coke at $80 worth $8,000, after the split you will have 200 shares of Coke at $40 -- still worth $8,000.
That’s it. Profits won’t change. Revenue won’t change. The price of Coke at the grocery store won’t change. The budget for advertising won’t change.
But for some reason, stocks usually pop after a split.
I would never advocating simply buying a stock to play this phenomenon. But there are a host of reasons to buy Coca-Cola regardless of the split. It’s a bulletproof brand, it reported strong Q1 earnings, it boasts a 2.7% dividend yield and is the largest holding by Buffett and Berkshire Hathaway.
You could do worse than own Coke right now -- especially considering the history of how stocks run up after a split.
Jeff Reeves is the editor of InvestorPlace.com, and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.
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Stocks usually pop after a split becasue they are cheaper to get in, causing share appreciation. Perhaps psychological, but historically proven. And because dividend yields eventually also revert to the mean, this bodes well for income oriented investors in the long run too.
Good stuff for those who wait...
That is definitely why it pops and why the pop varies. BRB.B went from $3,500 per share to around $70 which means A LOT of new investors can enter the game. I don't see a huge difference between $80 and $40 though. A small pop like last time of maybe 2% but I wouldn't expect much more than that. As a stockholder, I'll take any extra pop though. I'm getting really close to my target price although I need to reevaluate my target given recently announced earnings and potential stock split.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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