Speaking of Dividends -- Barron's Online


January 18, 1999

Splitsville: A List Of Possibilities

Long term, divided shares perform better

By Shirley A. Lazo

The bull market has made stock splits a common occurrence. Many financial types maintain that stock splits are nothing more than smoke and mirrors. Many investors, though, disagree. Rather, they see a split as a signal of general corporate optimism. True, a split or stock dividend doesn't boost one's proportionate ownership (although it may afford a psychological high). Nor does it enhance a company's earnings prospects or its cash flow. However, stocks that split, studies have shown, tend to do better than the general market over the longer term. Standard & Poor's got up a list of companies that are likely to divide their shares in the next six to 12 months.

Through the end of November, 210 companies whose stocks trade on the Big Board split their shares at least 3-for-2. S&P thinks it's likely that full-year 1998 splits will equal or surpass the 1997 record of 235. The previous peak was 1983's 225. The reason stocks that split generally outperform the market is "because companies that declare splits usually are enjoying rising earnings, and management is confident that profits will remain in an uptrend," the investment advisory firm said. "At the same time, a split is often accompanied by a dividend hike. In addition, smaller investors are attracted to the stock because of the lower price."

Two of the names on S&P's list of 24 already have announced splits. Tuesday, Yahoo, which was recently quoted at $320 a share, declared a 2-for-1 division after announcing that fourth-quarter profits had beat analysts' consensus estimates by a nickel a share and that revenues had tripled. And Compuware on January 7 voted a 2-for-1 split.

Yahoo gets the maximum five S&P STARS (the acronym stands for stock appreciation ranking system). Others with that designation, indicating they're a "buy," are Becton Dickinson, Biogen, Costco, International Business Machines, Kroger, MCI WorldCom, Nokia, Pfizer and Tyco International.

Those joining Compuware with four STARS ("accumulate") include America Online, Equifax, Lowe's, Solectron, Viacom and Xerox.

And those companies earning three S&P STARS ("hold") comprise Best Buy, FDX, Lucent Technologies (which will be acquiring Ascend Communications via a massive stock deal), Northern Trust, U.S. Trust, Wachovia and Wal-Mart.

S&P briefly appraised a couple of its picks. America Online, it notes, is the largest online service provider in the world, with more than 14 million subscribers. As a consumer-oriented company, AOL's peak usage time has been in the evening hours. "However, the pending acquisition of Netscape Communications should help the company penetrate the daytime at-work market via Netscape's Internet portal, Netcenter ... [which] is available without charge to all Internet users." S&P expects AOL's fiscal 1999 (ending June) profits, sans Netscape, to surge about 59% over the previous year's showing, to 56 cents a share, on a 45% jump in sales.

S&P said Compuware, "should benefit as one of the few companies offering comprehensive, end-to-end products providing for the detection, evaluation, repair and testing of Y2K glitches."

Tyco International is a conglomerate with operations in fire and safety services, disposable medical products, electrical and electronic components, and pipes and valves. S&P expects it to "extend its strong sales and per-share earnings gains of the past few years... . Tyco also has in effect a very active and successful acquisition program. It buys only companies that add to profits immediately and strengthen a core business." Two recent acquisitions are AMP, the world's leading maker of electrical and electronic connection devices, and U.S. Surgical, which makes surgical staples, sutures and disposable laparoscopic instruments. A 36% gain in profits for fiscal 1999, ending September, is what S&P envisions.

The Moneypaper has announced the launch of its new no-load MP63 mutual fund. The fund is based on the popular newsletter's 63-stock index of companies that offer low- or no-cost dividend-reinvestment plans. The index includes Coca-Cola, Intel, Johnson & Johnson, Paychex, Sara Lee and the aforementioned Tyco, among others. It has outperformed the Dow Jones Industrials and the S&P 500 since its inception five years ago. And since then, it has logged a gain of 175.51% through December 31, versus advances of 144.57% for the Dow and 163.56% for the S&P 500. The Moneypaper folks say "the strategy should minimize taxation and should be especially attractive for IRA investors and those seeking steady growth. About two-thirds of the companies in the index have raised their dividend for at least 10 consecutive years." The initial investment is $1,000 minimum.