If recent history is any guide, some of Canada's biggest banks could announce stock splits this year – providing a compelling reason to load up on these profit- and dividend-gushers.
Canadian Imperial Bank of Commerce and Bank of Montreal look like naturals, and one could build a pretty good case for Royal Bank of Canada, too. All three stocks trade near, or above, $100 each, which has been a typical threshold for previous stock splits over the past two decades.
While a stock split won't boost the value of your holdings, it can provide a signal from management it is confident about the future – and nice rallies have followed many previous splits by the banks.
Bank stocks have delivered average returns of 12.8 per cent, one year after their latest stock splits. That's more than twice the average return of the S&P/TSX composite index over these same periods.
When a company splits its stock in two, it doubles the number of outstanding shares, and halves the price and dividend payout (on a per-share basis). Some stocks can split into three or even more.
Companies do it to expand the number of shares and make them more affordable to small investors. There are some notable exceptions: Berkshire Hathaway Inc.'s Class A shares, which have never split, are now valued at $245,000 (U.S.) each after a runup from $19 a share in 1964. This example suggests companies can do just fine without touching their stocks.
So why get excited about bank stocks if they do announce splits? Simply put: It's a bullish signal.
Bank profits have been rising, despite challenges from a weak Canadian economy, low interest rates and struggling energy producers. But concerns remain. How will the banks navigate overvalued housing markets in Toronto and Vancouver? Will indebted consumers crimp borrowing? And what about the impact of rising competition from technology upstarts?
Splitting their stocks now would signal to investors the banks expect to overcome these challenges – and that their hefty share prices are here to stay.
Previous splits, although relatively rare events, marked good buying opportunities.
Toronto-Dominion Bank previously split its stock in 2013. The share price then rallied 15 per cent over the next 12 months.
Bank of Nova Scotia last split its stock in 2004 and it then rose 19 per cent. After CIBC split its stock in 1997, the shares surged nearly 28 per cent over the next year.
BMO got the timing wrong when it last split its stock, in 2001, during the bear market that followed the dot-com bust: The shares dipped 10 per cent over the next year. However, the downturn was far less severe than the 18-per-cent decline of the index over the same period.
In other words, stock splits should be applauded.
BMO, which is scheduled to announce its fiscal first quarter results on Feb. 28, did not comment on the issue. A spokesperson at CIBC, which reports its results on Feb. 23, said "stock splits are something that our board reviews from time to time and will continue to review."
But there is a strong case for both banks. When CIBC split its stock in 1997, it traded at about $70.
Today, the price is about $111, which means that a two-for-one split today would double your shares and reduce the price of each share to $55.50.
When BMO last split its stock in 2001, it traded at $80. Today, the price is $98. A split would reduce the price to $49.50.
RBC is another possibility. It last split its stock in 2006, when it traded at $98. Today, it's $93.
There is some anxiety among investors right now, given high stock valuations, rising U.S. bond yields and the threat of trade wars. Stock splits would be a soothing balm.