Investors looking for positive indicators of a stock’s future performance often consider a stock split a good sign. As a technical matter, a stock split changes nothing about a company’s performance or value. True, per share numbers must be adjusted, but the underlying revenues and profits aren’t altered—just the per share statistics. Still, companies often split their shares when their stocks have appreciated to the point where investors may question an investment because of limited capital. So, by splitting the shares, the stock becomes more appealing to a broader group of investors and, it is believed, that pent up demand for what is already a dear stock, based on a relatively high price, will help spur the price higher after the split.
Of course, stock prices don’t always continue to ascend after a stock split. And, there are times when companies with low share prices use reverse stock splits to boost share prices above exchange minimums so that they may remain listed. So, a stock split is not the sole criteria by which a company should be judged. That said, it is an interesting indicator that more research about a company could be worthwhile.
Every week on the back page of the Ratings & Reports section of The Value Line Investment Survey is a list of upcoming stock splits. Two stock with and upcoming splits are Alliance Resource Partners LP (ARLP) and Domtar Corp. (UFS).
Alliance Resource Partners LP
Alliance is a limited partnership engaged in the production and marketing of coal, primarily to major U.S. utilities and industrial users. The partnership has coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania, and West Virginia. In 2013, the company sold 38.8 million tons of coal. Alliance’s mining activities are conducted in three geographic regions: Illinois Basin, Central Appalachia, and Northern Appalachia.
Although we have pared our top- and bottom-line expectations for 2014 for Alliance, we believe that it will be a good year, nevertheless. Volumes climbed at a double-digit clip last year, to a record 38.8 million tons sold, though demand did wane a bit over the back half of the year. What’s more, the top line increased once again, as it has since the partnership went public in 1999, to a record $2.2 billion. The partnership continued to outperform its peers, despite some pressure in the broader coal industry. For 2014, we look for revenues to climb at a mid-single-digit clip, as management looks for coal volumes to be in a range of 39.25 million to 40.75 million. Earnings per unit, however, might well take a step back from 2013’s high water mark.
We look for revenues and earnings to improve next year, assuming decent economic fundamentals. The partnership currently has 27 million tons committed and priced for next year, with volumes likely to be in a range of 40 million and 42 million tons sold. Our top- and bottom-line forecast suggests decent, albeit unspectacular, gains year over year.
Alliance recently raised its dividend 2%, to $1.1975 per unit (per quarter). With that in mind, we now look for a 2014 distribution of $5.00 per unit. The partnership has increased the distribution each year since 2008 and the yield remains well above the Value Line average. There are a few caveats, however. Although the distribution is well supported by earnings, payout coverage is a bit less than it used to be. What’s more, we look for the distribution’s rate of ascent to slow somewhat in the years ahead.
These units have outdistanced their industry peers in recent months. Nevertheless, at the recent valuation, they have modestly above-average total return potential out to 2017-2019. The partnership is set to pay a 2-for-1 stock split on June 17th of this year.
Domtar designs, manufactures, markets, and distributes numerous fiber- based products including communication paper, specialty and packaging paper, and adult incontinence products. The company has three reporting divisions: Pulp, Paper, and Personal Care. As of the end of 2013, Domtar owned and operated 10 pulp and paper mills, along with 15 converting and distribution facilities.
Domtar might well enjoy a solid year in 2014. Management looks for paper shipments to be on par with last year’s level, but market demand for uncoated free sheet is apt to fall, as demand for this product remains in a secular downturn. A broad initiative to reduce capacity might well result in price increases for many producers, however. The company expects softwood pulp markets to maintain positive momentum, but new scheduled industry hardwood capacity makes the latter stages of the year a bit ambiguous. Overall, we look for revenues and share earnings to improve sharply, thanks to the recent addition of Laboratories Indas S.A.U. and the introduction of new production lines later this year.
We anticipate that the Personal Care unit will continue to be the bread winner. The worldwide aging of the population suggests that adult incontinence will become much more prevalent over the next several years, as baby boomers enter their golden years and medical advances help boost life expectancy. Domtar ought to also benefit from an increase in national healthcare spending, which goes along with an aging population and is aided by recent federal legislation expanding health insurance coverage in the United States. Also, with the acquisition of AHP last year, the company is now able to compete in the store-brand segment of infant diapers and training pants. We believe the addition of the infant products gives the company the complete bundle of materials at a scale required to meet national distribution. It also helps to bolster product diversification.
These shares have been on a run of late, approaching levels not experienced for quite some time. The stock is set to split 2-for-1 on June 18th, 2014.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.