Should the Stock Market Split?

Although that phrase may be hard to compute, consider this:  Companies split because they feel that their stock price is too high.  By doing this, they are also pricing new shareholders (and current shareholders) out of the market.

Also, consider that when you split your shares, you also split your EPS (earnings per share).  There is a common fear with splitting the shares, that you will dilute the company and there will be too many shares outstanding, which will ultimately destroy the EPS. 

Take a look of how high prices are currently in the market.  Let’s look at a few:  Lockheed Martin (LMT) is $107, Boeing (BA) is $100, and Union Pacific (UNP) is pushing $160.  Now consider if those companies split, their stock price splits.  Think of how many more investors would get into Boeing at $50 or Lockheed at around $55.  Plus their dividend yield would stay intact. 

The Dow Jones as it stands today is about 15,300.  If most big dividend companies split, the market could drive to near 30,000 because of all the new money that will flow in.  However, the market could also get destroyed from all the dilution of shares.  What do you think?  Do you think the market would ultimately fail if this happened? 

There have been recent splits of large companies in the last couple years already including Nike, Coca-Cola, Estee Lauder, and Colgate-Palmolive.    

Maybe some more big boys should split.....P&G.......United Technologies.......Apple.......

Two is better than One

A few posts ago I suggested that maybe Pfizer would be more valuable if it were split into two entities.  A short time ago, Kraft (KFT) split into two separate companies.  In the short time that the two new companies have been trading, they already beat the old parent company by $11 Billion in market cap value. 

The two new companies, Kraft Foods Group (KRFT) and Mondelez International (MDLZ), are both up significantly from the prices they started at.  Kraft Foods Group has a solid yield of about 4%, where Mondelez (the bigger entity) has a yield right under 2%.  MDLZ trades at a considerably lower price than KRFT, however I think both are very undervalued.  They will continue to grow and continue to raise their dividends.

Maybe Kraft will do what their old parent (Altria) did and break into more and more profitable companies. 

Consider:  MO > PM

                      > KFT > MDLZ

                                 > KRFT

Altria spun off Philip Morris International (PM) and Kraft (KFT).  Kraft split into Mondelez International (MDLZ) and Kraft Foods Group (KRFT).  If you owned Altria before they started spinning off companies, God love you! (If you owned Altria before the spinoffs, you would have gotten shares of all companies for free)

Will the tree grow more?  Will PM spinoff a company? 

The main goal is to maximize shareholder value, and that’s exactly what Altria did and will continue to do.

Boeing! Boeing! Gone!

Few companies that trade publicly are recession proof.  Even fewer companies you can buy and not look at for years.  One of these few companies is Boeing (NYSE: BA).  Boeing makes large and enormous commercial jetliners and also makes military grade jets as well.  They have orders for the next 100 years in their backlog.  They cannot produce planes fast enough to meet the demand.

Today, Boeing reported their quarterly numbers and destroyed them.  They actually said they would have been much better if their 787 ‘s were being produced faster.  Looking at the current valuation of Boeing, we see a market capitalization of just under $70 Billion.  There is no reason why this cannot be above $100 Billion.  Seeing this kind of room in a market cap for a large entity such as Boeing is something that I look for when investing.  The more room you think the company has to grow, the greater opportunity it is.

For example, when Apple was above $700 a share, there market cap was getting close to $700 Billion.  Being that Exxon was about $300 Billion behind Apple, I had some reservations about buying the stock at those lofty levels (even with a $1,000 price target on it). 

It’s not hard to buy a great company.  But even a great company can be overvalued and not attractive at their current price, but at a lower one. 

In the case of Boeing, I feel that it still heavily under valued and will go well beyond $100 a share (currently trading close to $91).  

Shareholder Value: Separating a Monster

Earlier this week, Pfizer’s CEO Ian Read spoke about maybe splitting the company into two.  Pfizer trades below 90% of its peers on a P/E basis.  For example, Bristol-Myers   Squibb has a P/E of 30; Merck has a P/E of about 20.  The theory is that by splitting the company into two separate entities, they will be able to unlock more shareholder value.

Pfizer’s market capitalization is roughly $200 Billion.  The general consensus is that there is at least another $35-$40 Billion more to go, making Pfizer’s market cap around $240 Billion. 

In some respects splitting the company up maybe good.  Figure that two separate entities go up 20% a piece.  Now, the original shareholder of Pfizer, which now has both entities, is up 20% on two separate companies.  This is what is referred to as unlocking shareholder value.  Maybe the company is too big and would be better run as separate parts.

            Consider that Altria Group (MO) also known as Phillip Morris USA spun off multiple monster companies.  They spun off Kraft foods (KFT) and Phillip Morris International (PM).  Kraft has recently split into two companies and is now Kraft Foods Group (KRFT) and Mondelez International (MDLZ).  So if you were an original shareholder of MO, look what you would have gotten just for being an original shareholder!  You would have a piece of all of this!

The question is:  Is it best for the shareholders of Pfizer if the company breaks into two where the shareholders will automatically get shares of the other.  Perhaps running two smaller entities will allow for more profitability and more shareholder value.  I am a shareholder and I would love to see this happen!

Money makes Money? Yes!

King Felix just signed a 7 years $175 Million contract with the Seattle Mariners.  That is $25 Million a year for 7 years guaranteed.  With so many high profile sports athletes going bankrupt you think there be someone there in the beginning to help them out.  I would love to help them, but I think there are so many people pulling them in so many directions asking for this and that, that it is hard for them to say no.  It’s hard for them to turn down certain people that helped them so much along the way if they ask for something monetarily.  For a young man or woman to be used to making a paycheck of maybe $800-$1,000 every two weeks and now makes about $300,000 a paycheck things will change. 

I understand that you want the cars, you want the bling-bling and you want the houses.  Lets use Felix Hernandez as an example.  He will get about $15 Million clean (after all taxes).  Five of that fifteen will go to buying a house, buying a few cars and traveling naturally.  What about saving money?  If you were to tell Felix that you could guarantee him about $500,000 a year just off dividends would he believe you?  Well, he would have to after he read this. 

Consider this:

Philip Morris (PM) has a dividend of $3.40 a year

Altria (MO) has a dividend of $1.76 a year

Kimberly-Clark (KMB) has a dividend of $2.96 a year

Clorox (CLX) has a dividend of $2.56 a year

Pfizer (PFE) has a dividend of $.96 a year

A dividend is a cash payment on the shares that you own.  Lets consider that Felix puts $2,000,000 in each holding after he spends the $5 million on necessities. 

PM—25,000 shares----$85,000 guaranteed

MO---66,666 shares----$117,332 guaranteed

KMB—25,000 shares----$74,000 guaranteed

CLX----28,571 shares----$73.141 guaranteed

PFE----90,090 shares----$87,272 guaranteed

Regardless of what the stock price does the dividend does not ever change.  All of these companies have seen about a 30% advance on top of the dividend as well.  Felix is guaranteed $436,745 a year no matter what.  That is a nice sum of money for doing absolutely nothing besides putting your money in the right place.  Why do they not know this?  Why don’t they get the help they deserve?  It’s simple really.  Invest in great companies that have been around forever and will be around long after our grand kids.