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 InvestorPlace Apr 25, 2012 12:07PM

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 editor@investorplace​​.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. 



Related Articles

 

9Comments
Apr 25, 2012 12:39PM
avatar

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...

Apr 25, 2012 12:46PM
avatar
Dividend stocks are great - Dividend Stocks that split are the greatest!
Apr 25, 2012 1:27PM
avatar
Dividend amount is split along with the stock
Apr 25, 2012 3:49PM
Apr 25, 2012 4:18PM
avatar

Smile

Let's keep a move on to DOW 20,000!

Apr 25, 2012 1:48PM
avatar
"...Maybe it’s because smaller investors afraid of high-priced stocks are finally enticed into buying." - DING DING DING

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.
Apr 26, 2012 2:56AM
avatar
 If you have extra money to invest with this would be a great investment. The fact it has not split in 16 years and has very strong earnings would be enough for me. I would get out pretty quick after the split goes up 3-5 %, it will spike up the first week after the split. As long as your watching it and are not to greedy there is money to made if you can get a good price before the split. Nothing is a sure thing.As Cramer would say you could always take a little profit off the top after the split because as fast as it goes up it will spike down quick, I would buy some back at that time. As a long term investment it is a great solid company and if your in it for the long haul and have patience with capital there is money to be made with KO. 
Aug 4, 2013 7:28AM
avatar
Disney has done well for me. Had a four for one split once and two for one split. Both times went fro 140 a share or so to 25 a share. Held on and went back up to 100 a share split to 25 and again went up to 80. Bought Marriott after a split. Went downt 18, sold at 23, went down to 13 bought and saved till 40 all in one year... That was a good one
Apr 25, 2012 12:52PM
avatar
Does this mean that the dividend amount is cut in half as well?  If not, you are doubling your dividends from the company, hence making it better for shareholders, right?
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
266
266 rated 2
485
485 rated 3
660
660 rated 4
586
586 rated 5
652
652 rated 6
640
640 rated 7
504
504 rated 8
289
289 rated 9
159
159 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.