There are a number of expensive stocks in the stock market that should split in calendar year 2012, and high up on that list is credit card company MasterCard Incorporated (ticker symbol: MA). As of this writing (2/21/2012) the intraday price of a single share of MasterCard stock is $396.92. Of course the term “expensive” is relative, and referring here simply to stock price, and not to underlying valuation metrics like P/E (price to earnings), P/B (price to book), or the company’s PEG ratio. That said MasterCard really should be on the list of upcoming stock splits for this year. Of course some companies never split like Berkshire Hathaway (ticker symbol: BRK.A), or Google (ticker symbol: GOOG) -- showing their long-term growth in their prices -- but that’s a different article... they really should split!
Why Stocks Split? And Why MasterCard Should
A company’s board of directors decides to split a stock (or reverse stock split) to reset their share price to encourage more retail investors to buy or invest. Of course, MasterCard’s market capitalization ($50B) would remain the same before and after any split, only the number of available shares authorized by the company would change. The hope is that a lower stock price would boost demand based on perception and affordability - which sometimes drives retail buying and pushes the stock price up -- after the split. This perception of 'expensive' is also based on a stock's competitors, so take a look at the stock price of Visa Inc (ticker symbol: V, $115.53), American Express Company (ticker symbol: AXP, $52.91), Discover Financial Service (ticker symbol: DFS, $29.65), and others -- and imagine the decision making process of many retail investors. Would you buy one share of MasterCard or seven shares of American Express?
At nearly four hundred dollars per share, retail investors buying MasterCard stock would only be able to purchase shares in multiples of that price. Requiring $400/$800/$1200 to buy one, two, or three shares, a 2-for-1 split, or 4-for-1 split would make it possible to buy in other share increments. At $100 per share, after a hypothetical 4-for-1 split, two imaginary investors with $300 and $700, plus necessary transaction fees, would be able to buy three (3) or seven (7) complete MasterCard shares, respectively. As the price stands now, the first investor with $300 cannot invest in MasterCard yet at all, and the second can only buy one share -- not yet having enough for a second.
While these cash amounts might sound a bit odd -- imagine American retail investors dollar-cost-averaging into a Roth IRA account annually at the maximum of $5000 per year, or $6000 if you are age 50 or older (check the IRS website, income limits apply). Roth accounts are advantageous for long-term retirement investing because the annual contributions go into the account 'post-tax', but come out tax free in retirement.
Five thousand dollars invested equally over 12 months is about $416 per month. With monthly dollar-cost-averaging, investors can buy shares at lower and higher prices depending on market conditions. Although the transaction fees are an issue monthly, in our previous scenario after a hypothetical 4-for-1 stock split, this Roth IRA investor would be able to buy four (4) shares of MasterCard per month, or twelve shares (12) per quarter - each qualifying for MasterCard’s modest dividend. (The bi-monthly or quarterly investing would reduce the impact of transaction fees on overall gains.)
Share Quantities Don’t Matter, Stock Splits Do
When you invest money and buy shares of any stock, you are buying a piece of a company, a part of a franchise, or a portion of that business. Because the shares don’t represent anything more than some diversification for your portfolio -- you can think about the shares this way. For example, $1500 invested in Wells Fargo & Company (ticker symbol: WFC, $31.35) is exposure to their company, the US financial sector, and one of the big money center banks. It doesn’t matter how many shares of this stock you own, just that you have $1500 invested in their business, and what the percentage amount represents of your overall portfolio over time. Same thing with MasterCard shares. If you invest $3000 over time in this credit card company, you will have exposure to consumer spending in developed and emerging markets, as well as a premier franchise in the business services and technology sector. It won't really matter if you have eight (8) shares or thirty (30) -- just that a portion of your money, not invested in mutual funds, ETFs, or bonds -- is in this company stock.
MasterCard Stock Valuation
Credit: MasterCardFormer hedge fund manager, CNBC contributor and Mad Money host Jim Cramer compares stocks splitting to breaking a pencil. After it’s broken, you still have the same amount of pencil -- just two separate pieces. What makes MasterCard a compelling investment is that even at nearly $400 a share it looks cheap based on possible valuation. With a tiny dividend (0.30%), the stock attracts investors based on a trailing P/E of nearly 27 and a forward P/E of less than 16 (according to Yahoo finance). But the company has no debt, a 28% profit margin and a five year expected PEG ratio of 0.92 -- less than one is worth investigating for growth companies. And consider their growth possibilities... Will their services become a bigger part of commerce and transactions worldwide -- including more emerging and frontier markets? Will near field communication (NFC) technology play a part in wireless devices like smartphones bringing MasterCard new revenue streams?
Conclusion: Stock Split or DRIP Plan!
So MasterCard should split their expensive stock in 2012 to ensure that more retail investors can participate in their global growth story. If not they should at least institute a DRIP (dividend reinvestment program) or DSPP (direct stock purchase plan) allowing investors to regularly buy fractional shares directly in MasterCard (from a transfer agent) without high transaction fees. Then every month, that Roth investor would buy $416 worth of MasterCard, or $415 if they charged a dollar for the DRIP plan. (That would be 1.0455 shares using the price of MasterCard today.)