Friday, March 13, 2015

One of my favorite companies is splitting its stock {and why you should look in to this}

Hello fellow investors,

Hope everyone had a great week. Today I want to talk about an announcement that Visa (V) made a couple of months ago regarding a stock split. Visa is a portfolio favorite of mine. I bought shares back in late 2012 and haven't looked back since. The stock is up over 84% since my time of purchase. Had I known this was going to happen I would have put my entire portfolio in there. Well, maybe not. But is nice to dream.



This may sound familiar (as I say it a lot on the blog) but I wish I would have grabbed more shares than I did back in 2012. Nonetheless, I am grateful for what I do have and perhaps this new stock split may be a chance to add to my position. Speaking of which, lets get right to business.

Back in January 29th of this year, Visa reported earnings for their first fiscal quarter of 2015. Besides announcing solid year over year increases in important metrics such as  net income, net operating revenue, total processed transactions, and payment volume growth; the company also took the opportunity to announce a 4:1 stock split to take effect on March 19th, 2015 (Thursday of this coming week). If you wish to read the press release check it out here. 

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Mini Lesson:

For my beginner investors, just want to clarify what I mean by a split--

  • A 4:1 stock split means that the stock price will be split in 4; and the company will start trading at such stock price going forward. For example, if the stock is currently trading at $266; the new stock price as of 3/19 will be $66.50. If you are a new investor in the stock, you can get a full 4 shares of the company for $266 instead of just one share.
  • On the other hand, lets say you already own 10 shares of the company. After the split, you'll have 40 shares (the amount of shares multiplied by 4).

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...not relevant to V but funny nonetheless :)


Now, let me just be clear in that a stock splitting doesn't change the value of the company or the stock. It doesn't mean that all of a sudden the company is worth less or more or that buying a stock when it splits will guarantee anything. While there will be more shares of the company outstanding, the market value remains the same.

Now, you may be asking yourself, why do companies do this? While there are many reasons why a company may want to pursue a stock split, here are two main ones:
  • To make the price more attractive to individual investors who may want to buy shares but refrain to do so due to a "high price". When the stock splits, the price appears more attractive 'psychologically speaking' even if nothing has changed.
  • Helps create a diversified shareholder base or a larger pool of various types of investors lessening the chances that one individual institution or group takes larger control of public shares. Gives the broader public the opportunity to also be a part-owner. 
if you have more reasons you'd like to share, please let me know in the comments.

Why should you care that Visa stock is splitting?

As previously mentioned, the company is one of my favorites. They have an incredibly profitable business model and are at the forefront of changing times as the percentage of people using credit/debit cards as opposed to cash continues to increase exponentially over time. Even with the new smart phone payment systems that are up and coming, people are still using the cards yet simply 'swiping' their phones as oppose to plastic. Either way, companies like visa are still getting their healthy cut for every single transaction that is made and maybe even more so now and in the future considering the popularity of smart phones.

I wrote an investment thesis for why I like companies like Visa and MasterCard on a previous post. You can check out the full analysis for Visa here. The post shows why I feel so strongly about these type of companies and why I am considering adding to my position after the stock split. Maybe this is something you'd consider for your own portfolio (as always, make sure you do your own due diligence).

Thank you for reading.

Tell me, has a stock split ever motivated you to add to a position or buy shares of a company?Or, is that something you don't necessarily care about?

Cheers to profits,

Mabel

I currently own shares of Visa (V) and MasterCard (MA).