Thursday, February 19, 2015

Let's look at stock splits of KO and PEP

The Coca-Cola Company (NYSE: KO) recently reported fourth quarter and full-year 2014 operating results.  Here in SA, there are a lot of analyses about the bearish or bullish views on this stock.  While I was doing my piece of homework, KO's stock split history draw a lot of attention from me.


This impressive chart is from Coca-Cola Company's website.  Based on the closing price at 07/09/12, value of one share purchased for $40 in 1919 has become $359,332 per share, which is up 8,983 times of original investment.  Approximate value of the same share with dividends reinvested annually is $10.3 million.  These data are amazing. I am prompted to dig more on this aspect of the company, and try to understand what it means for a dividend growth investor.  Also, curiosity made me to pull in Pepsi's stock split history for reference and comparison.

KO & PEP Stock Split History Since 1965

(Source: Yahoo.com)

Since May, 1965, KO has experienced 8 stock splits, 7 of which were 2:1 splits, and 1 was 3:1 split.  If 1 share was bought before the stock split date in 1965, it would have become 384 shares in September 2012.

Pepsi started the stock split race since 1977.  PEP experienced 4 stock splits since then.  This company offered even more aggressive splits at 3:1 for 3 out of 4.  

Since 1977, Coca-Cola offered two more stock splits than Pepsi. One in 1992, and the other one in 2012.  For comparison, if one share was bought before May, 1977, KO's 1 share would become 96 shares up to date, while PEP's 1 share would become 54 shares.

 Now let's look at the closing prices before and after stock splits.
(Source: Yahoo.com)

For KO, when share prices bounced to $70-$80 range, a stock split would usually occur.  The purpose was to bring stock prices back to around $40, either through 2:1 or 3:1 splits.

For PEP, when share prices rose to $70-$90 range, a stock split would bring the share price back to $25-$35 level.  Recently PEP market price has raised to about $100. Considering the stock split absence since 1996, we suspect a new stock split might be around the corner, assuming Pepsi management maintains the same strategy.

The awesome thing about these quality company is that, after the stock prices were cut down in half or even one third due to stock splits, market prices would raise once again to the before stock split level within as short as 2 years, or as long as 16 years, when a new stock split would usually happen. Thus continues the virtuous cycle.
Stock split's effect on dividends

First, let's only look at KO in a longer perspective.


Assume one share was bought in 1962 at price $100.  To simplify the calculation, dividend re-investment isn't considered here.  (If dividend re-investment is considered, the result will be much more magnified.)  You may refer to this spreadsheet for the calculation details.

After 53 years from 1962 to the end of 2014, 1 share became 384 shares. Total dividends amounted to $3004.05, and this equaled to 6.70% compound annual growth rate (CAGR).  You may think this dividend amount is not so impressive.  However, if you look at the inflation rate in the same period, you'd see the dividends were much higher than inflation ($3004.05 vs $783.89, CAGR 6.70% vs 4%).  Based on current market price $42/ share, total market value of this share will become $16,128, and the CAGR is 15%.

Now let's compare KO and PEP in the period from 1977 till the end of 2014.



Above chart shows total accumulative dividends for KO's 96 shares would be $750.83 (CAGR 6.08%), and for PEP's 54 shares totaled at $1,296.57 (CAGR 7.99%.)  Again, no dividend re-investment is considered.

KO's 1 share market value would become $4,032, based on current market price $42. CAGR was 10.9% upon original 1 share price $80. PEP's market value would be $5,400 based on current market price $100 (CAGR 12.15%, upon 1 share price $70.)  For details, please see this spreadsheet.


Above chart illustrates the KO & PEP annual dividends of 1 share purchased in 1977.  From the picture we'll see that stock split is an accelerator for dividend increase, which usually double or triple annual dividends income.  So for these excellent companies like KO & PEP, annual dividend growth is no doubt very important, but from the long run, stock split matters even more for a persistent investor.

Final thought

Persistence is an important character for Dividend Growth Investors in the road to pursue financial freedom.  This virtue is even more important for investing in legendary companies such as Coca-Cola and Pepsi.  When think about purchasing shares in KO or PEP,  we should have a longer-than-normal perspective, say 20-30 years into the future. The longer, the merrier.  In the long run, we'll happily harvest in the extra multiple shares because of stock splits.  Otherwise, if we only confine us into a particular short time period, we might stuck in the Cautionary Tale.

My strategy for KO is to write puts with striking price at $40.50.  This is the current entry price that would offer me 3% annual dividend yield.  If the puts were executed, I'd be happy to hold the stock forever and may write covered calls to generate some extra moderate income.  Otherwise, I'll keep on writing puts at the 3% yield threshold.

For Pepsi, as mentioned above, I suspect a new stock split might occur soon, thus I would like to purchase some shares and hold forever to garner the benefit of possible new stock split while happily collecting dividends.

Disclosure: None.

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