Fewer Stock Splits, Record Share Prices

Stock splits, designed to attract investors by making stocks more affordable, have become a rarity since the 2008 financial crisis. Four companies in the Standard & Poor’s (MHP) 500-stock index split their shares this year, and 16 did in 2011. That’s down from an average of 35 annually from 2004 through 2007 and a recent peak of 102 in 1997, data compiled by S&P and Bloomberg show.

When a company splits its stock, holders get one or more shares for each share they own, while the price of the stock comes down proportionately, leaving the market value of the company unchanged. Traditionally, corporate boards have favored splits when the company’s share price has risen so high that individual investors find it difficult to buy 100 shares at a time. They often aimed to do a split at a time when they were “confident” the stock would maintain its value or rise, says Doug Ramsey, chief investment officer at Leuthold Group, a money management firm. The market plunge that accompanied the financial crisis has made corporate executives cautious about splits. “There’s a reluctance to split a stock after such a decline is still fresh in the collective memory of management,” he says.

The scarcity of splits has helped send the average stock price of companies in the S&P 500 to a record $58.52 on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than the average price of $53.66 when the index reached its all-time high of 1,565.15 in October 2007. With the S&P 500 up 97 percent as of May 15 from its low of March 2009, the effect has been to push 48 stocks above $100 a share, a record, according to Bloomberg data going back to 1990.

Individual investors have been wary of stocks since the market plunge that accompanied the financial crisis, and higher per-share prices may be contributing to the drop in stock trading by creating psychological barriers for investors who want to purchase blocks of 100 shares. “This is starting to be a real big issue for retail investors,” says Christopher Nagy, managing director for order routing sales and strategy at online brokerage TD Ameritrade (AMTD). “There’s this phenomenon going on where there’s hardly any trades in the marketplace, volume is at 10-year lows, and a lot of that can be attributed right back to share pricing.”

Trading at discount brokerages has slowed since the financial crisis, according to data on E*Trade Financial (ETFC) and TD Ameritrade compiled by Barclays (BCS). At 537,636 transactions per day in March, volume was 15 percent below a high in October 2008. Trading on all U.S. exchanges fell to 6.73 billion shares a day this year from 9.99 billion in the second half of 2008, data compiled by Bloomberg show.

Apple (AAPL), which hasn’t split since 2005, is up 37 percent this year to $553 on May 15. In the four months through April 9, it added more than $250 billion in market value. Priceline.com (PCLN) trades at $662, the highest price in the S&P 500.

Chipotle Mexican Grill (CMG), with the sixth-highest price in the S&P 500, hasn’t split its stock in the six years since it became a standalone company. The restaurant operator reached an all-time high of $440 on April 13. “Splitting is nothing more than window dressing,” says Chris Arnold, a Chipotle spokesman. “It doesn’t change or add value for anybody, not customers, not the company, and not shareholders. Doing these things to manipulate the price in a way that doesn’t create value just to make it accessible to a few more people is really unimportant to us.”

When Google (GOOG) announced its first stock split in April, it wasn’t to appease stockholders. Instead, the company said it created a class of nonvoting shares to exchange for options owned by employees, so that redemptions wouldn’t dilute the control of its top executives. After issuing the new stock, shares of the search engine operator will be cut in half from more than $600.

Warren Buffett is known for his opposition to stock splits, saying that companies that avoid them even when prices soar encourage investors to think like owners instead of traders. His Berkshire Hathaway (BRK/A) Class A shares trade above $120,000. Even Buffett bowed to investor demand for lower-priced stock by adding Class B shares that were worth about 1/30th the equity value when introduced in May 1996. He split those 50 for 1 in 2010 to facilitate the takeover of Burlington Northern Santa Fe.

Not everyone believes high share prices discourage investors. “I don’t think that just because stocks are not being split or they are too expensive would keep investors out of the market,” says Michael Gibbs, co-head of the equity advisory group at Raymond James & Associates. “It might push them to other stocks. The reason they’re not in the market is the decade they suffered.”

The bottom line: A decline in stock splits helped push the average price of a stock in the S&P 500 to a new record, $58.52, on April 30.

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Can Coke Surpass Its Record High of $88 a Share?

By Duane Stanford

Coca-Cola (KO) Chief Executive Officer Muhtar Kent will tell you he doesn't pay any attention to the company's share price. "We do the right thing, and our share price manages itself," he says. His predecessor, E. Neville Isdell, often said the same thing. Today, Isdell, who stepped aside as CEO in 2008, admits that he obsessively checks the stock on his BlackBerry.

The stock's $87.94 high-water mark on July 14, 1998, still haunts company headquarters in Atlanta. The five-year decline that brought shares to $37 in March 2003 reflected the turmoil within, as the company struggled with bloated costs, management upheaval, and a loss of focus on its core product, soda pop. Coca-Cola has been addressing those problems, and after a setback during the recent global recession, its shares on May 19 hit $68.46, the highest level in more than a decade. Yet even as it improves operations, the company is unlikely to generate the exuberant support from investors that propelled the stock in the 1990s, and some money managers who own the shares say it will be two years or more before they surpass the high established 13 years ago.

Coke began the slow climb out of its hole in 2004, when the directors lured Isdell, who had held high-ranking positions at the company, out of retirement to be CEO. In a strategy that came to be known as "Red, Black, Silver," Isdell refocused the company—which had been giving priority to noncarbonated drinks—on its core products, Coke (Red), Diet Coke (Silver), and, starting in 2005, Coke Zero (Black). Executives pushed supermarkets to give them prominent display and more shelf space. Isdell also put in place a succession plan that led to Kent taking over as CEO in July 2008.

Kent, 58, got to work on Coca-Cola's U.S. operations. He introduced 7.5-ounce minicans that sell for about $3.50 for an 8-pack, aimed at people who want to control their soda portions, and 16-ounce bottles priced at 99?. Both sizes fetch higher per-ounce prices than the standard 20-ounce bottles in convenience stores and 2-liter bottles in supermarkets, where competition keeps prices low. Last year, Kent purchased the company's largest franchised bottler, giving the company control of 90 percent of its U.S. and Canadian distribution.

Kent also reconfigured serving sizes globally to meet shifting consumer demands and boost profit margins. Since March 2009, he's promised to spend at least $27 billion through 2020 for new plants and distribution facilities in emerging markets, including Mexico and China. Coca-Cola gets nearly 80 percent of its sales outside the U.S.

The moves are having an impact. The company has posted four consecutive quarters of sales growth by volume in North America. Last year, Diet Coke surpassed Pepsi-Cola as the second-best-selling soft drink in the U.S., according to data from trade newsletter Beverage Digest. Coca-Cola remained No. 1. The company's profit margin grew to 22 percent in 2009, up from 18 percent in 2008. By comparison, PepsiCo's (PEP) profit margin was about 14 percent in 2009, up from 12 percent the previous year.

Coca-Cola's stock rose 30 percent in the year ended May 31, outpacing PepsiCo's 13 percent and the Standard & Poor's 500 Consumer Staples Index's 23 percent. Coca-Cola's price-earnings ratio stands at about 19, modest by historical standards. At the 1998 high, Coca-Cola's shares were trading at almost 48 times the company's annual earnings, reflecting investors' willingness to pay a premium to own what they saw as a reliable growth stock. "It had a p-e that turned out to be unjustified," says Douglas Lane, president of New York-based Douglas C. Lane & Associates, whose clients hold more than 600,000 Coke shares.

So when will Coca-Cola get back to $88, a 31 percent climb from $67, its May 31 closing price? In the short term, Coca-Cola faces volatile commodity costs that could force it to raise prices at a time when consumers may balk, says Lauren Torres, an analyst for HSBC Securities. She estimates Coca-Cola will trade at $71 a year from now.

Lane says a new high will come in two to three years. He expects Coca-Cola's profit to rise 10 percent to 12 percent annually during that time—respectable, but below the rates the company enjoyed in the mid-1990s. Assuming Coca-Cola's p-e ratio stays at 19, the earnings gains would imply a stock price of $90 in 2013. "It's still a relatively inexpensive stock," Lane says. "It has broad positions globally, it's broadened its product line, and it's got a really top-notch fellow running the company now."

Donald Yacktman, whose Yacktman Asset Management holds 11.9 million Coca-Cola shares, estimates it will take five years for the stock to reach a new high. "It's just a matter of grinding it out," he says. Carlos Laboy, an analyst for Credit Suisse (CS), is far more optimistic. In a note to clients in May, he estimated Coca-Cola's shares will hit $95 in a year. "We believe KO's U.S. business is reaching an inflection point," he wrote, referring to the company by its stock symbol.

Isdell, retired again and traveling the globe speaking about corporate sustainability, smiled recently when asked for his best estimate of when the stock would surpass its 1998 high. "Eighty-eight is a funny number," he said. "What you have to do is look at the fundamentals, and I think eventually you're going to get there."

The bottom line: While Coca-Cola stock has rallied 30 percent over the past year, some analysts and investors predict a slow climb to its 1998 record.

Stanford is a reporter for Bloomberg News.

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AIG Share Sale Resolves Spitzer Probe

May 24, 2011, 12:26 AM EDT By Noah Buhayar

May 24 (Bloomberg) -- American International Group Inc. investors including Ohio firefighters are being compensated for stock declines dating to Eliot Spitzer’s 2004 probe as the insurer raises funds to move beyond a U.S. rescue.

AIG will use $550 million from a share sale scheduled for today to pay for a settlement reached last year in a securities- fraud case brought by investors led by Ohio pension funds. The bailed-out insurer and U.S. Treasury Department are selling 300 million shares to replace government funds with private capital. The sale would raise about $9 billion at yesterday’s closing share price, with two-thirds going to Treasury.

Chief Executive Officer Robert Benmosche, 66, has been working to resolve legal disputes tied to probes by Spitzer, who won a $1.64 billion settlement with AIG in 2006 when he was New York attorney general. Benmosche needs to attract private investors as Treasury seeks to lower its stake in the New York- based insurer from 92 percent.

“The new shareholders, after day one of this share sale, they absolutely want a clean slate,” said Roddy Boyd, author of “Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide.” AIG’s management has “enough competitive pressures out there, having sold their crown jewels, that they don’t need things weighing on the share price.”

AIG has slipped 38 percent this year through yesterday in New York trading as the insurer was forced to add $4.2 billion to reserves after disclosing a shortfall in February. Benmosche, AIG’s fifth CEO since 2005, has sold the company’s biggest non- U.S. life insurance units to help repay the bailout.

‘Better Trajectory’

The 2006 settlement resolved Spitzer’s allegations that AIG misled investors, faked bids and cheated workers’ compensation programs. The deal, which Spitzer said would “send AIG off on a better trajectory,” failed to restore investor confidence in the firm and fueled the insurer’s disputes with other states, rival insurers, investors and ex-executives.

Record losses in 2008 cast doubt on whether AIG could compensate investors hurt in 2004, said Thomas A. Dubbs, senior partner for Labaton Sucharow LLP and lead counsel for the Ohio funds, which provide for the retirement of firefighters, police officers and teachers. In 2010, as AIG returned to profit and struck a deal to regain independence, Benmosche agreed to settle the case for $725 million, with an initial $175 million payment.

Raising the rest through the share offering was “a creative and outstanding result, given that in the fall of 2008, many people believed AIG might not survive,” said Dubbs.

The agreement also covered public pension funds in New Mexico, Mississippi and California. The group said AIG had fraudulently inflated results, causing the share price to plummet when the deception was uncovered.

‘Restoring the Value’

The accord allows “AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise,” said Mark Herr, a spokesman for the insurer. AIG will use remaining proceeds from its portion of the share sale for general corporate purposes, the company said May 11.

AIG resolved legal disputes in 2009 with former CEO Maurice “Hank” Greenberg, who was forced out during the Spitzer probe. The insurer agreed to reimburse as much as $150 million in legal fees for Greenberg and ex-Chief Financial Officer Howard Smith.

State insurance regulators and AIG’s rivals said the Spitzer settlement didn’t account for all of the firm’s deception in shortchanging workers’ compensation pools and demanded additional funds. Benmosche agreed in December to pay $100 million in fines and $46.5 million in taxes to a group of state regulators.

Liberty Mutual Holding Co. said last month that AIG should pay $1.5 billion to settle a dispute with competitors over the industry pools, more than triple what AIG agreed to in a preliminary settlement with rivals including Travelers Cos. AIG said May 6 that disputes tied to workers’ compensation markets contributed to the insurer raising reserves.

AIG plans to sell 100 million shares today, and Treasury expects to sell 200 million, according to data compiled by Bloomberg. The offering will reduce Treasury’s stake in the insurer to about 77 percent, AIG said in a regulatory filing.

The case is In re American International Group Inc. Securities Litigation, 1:04-cv-08141, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Dan Kraut, William Ahearn

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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