Good Splits and Bad Splits
08/03/2015 10:00 am EST
Not all stock splits are equals, suggests Neil Macneale, who cautions against stock splits that involve non-voting stock. The editor of 2 for 1 also highlights some recent splits that warrant investor attention.
Steven Halpern: Our guest today is Neil Macneale, editor of 2 for 1 Stock Split Newsletter. How are you doing today, Neil?
Neil Macneale: I’m just fine, Steve; good to be back.
Steven Halpern: First, could you tell our listeners a little about the 2 for 1 strategy?
Neil Macneale: Yes, the 2 for 1 strategy is based on the finding that companies that announce splits outperform—on average they outperform—the market for two-to-three years.
So, we’ve constructed an index that contains 30 companies, all added to the index soon after their split announcement, and we add one every month, take the oldest one off of the top of the list, so we have a moving ladder of 30 companies basically all with the stock-split advantage, as I call it.
Steven Halpern: Now, you also point to a recent trend in which companies are issuing new classes of non-voting stock and in turn calling that a stock split, but you don’t seem to be happy with those moves. Could you explain what those companies are doing and why you’re not a fan of these actions?
Neil Macneale: Well, for one thing, most importantly, the stocks that they’re issuing have no voting rights and they trade under a different ticker symbol. It’s really not a stock split in the traditional sense. I think this trend is essentially dangerous. It’s eroding the basic and original concept of the corporation.
Corporations are created to benefit the shareholders, but there is also an understanding that they were benefitting the public good.
And I think that concept has been lost now and management—the founders of these companies—are basically creating this new class of stock to obtain the benefits of a stock split with greater liquidity and less volatility, and so forth, but they are also retaining the control over the company in a way that’s really not healthy, I think.
Steven Halpern: Would you mention a couple of the companies that you think fall under this category?
Neil Macneale: Well, Google (GOOG) kind of started the trend a couple of years ago and then Under Armour (UA). Under Armour is the one that performed this non-voting split recently and then Zillow (Z) just last week announced a move very similar. These are well-known companies and I think it’s something that we really need to be watching out for.
Steven Halpern: Now, looking more closely at what you consider to be perfectly legitimate stock splits, you recently added the Japanese Company, NTT Corp. (NTT), to your model portfolio. Could you share your thoughts on that?
Neil Macneale: Yes, NTT is one of the biggest mobile phone companies in Japan. It’s now at about an $85,000,000 market cap, but its fundamentals are fabulous. It has a low P/E, pays a good dividend.
It’s really a rock-solid company. I guess equivalent to what we’d say, what we’d think of as AT&T (T) in this country and its management declared a split in its ADRs.
Well, it split the shares in Japan. The ADRs in the US are going to change their ratio. It’s a little complicated, but the price won’t change in the U.S., but the fundamental reason for splitting the stock is why we like it, really.
Steven Halpern: Now, you’ve also recently recommended a company called CF Industries (CF). What’s the story here?
Neil Macneale: Well, CF Industries is one of those big companies that nobody has ever heard of (laughter). It makes fertilizer and it’s really, I guess it’s just a play on the continued health of the agricultural sector. It’s a little bit more volatile than we like, but it’s a solid company.
Let’s see, I guess the biggest reason is that it is highly profitable, really. It’s one of those, kind of, under-the-radar companies that make a lot of money and it should do well for us, I think, over the coming years.
Steven Halpern: Now, as a testament to the long-term success of your strategy, there’s now an index and even an exchange-traded fund that is based on your model portfolio. Could you briefly tell us about these exciting developments?
Neil Macneale: Well, I’ve been writing the 2 for 1 Newsletter for 19 years and we’ve achieved—the index that we mentioned earlier has achieved a 12.5% annualized return—and this caught the eye of a group in Oakland, California that runs about a dozen other ETFs.
And they decided to use the 2 for 1 index as an index to follow in an ETF and that went public in September of last year; so it’s almost a year now.
They’ve achieved a pretty good record. They’re up about 4.5% for the year-to-date, so well ahead of the market and we’re very pleased with that. It’s good to have the recognition for the 2 for 1 strategy, I think, in a way, that the retail investor can easily take part.
Steven Halpern: Again, our guest is Neil Macneale of the 2 for 1 Stock Split newsletter. Thank you so much for your time, today.
Neil Macneale: Oh, you’re quite welcome, Steve. Take care.