Dividend Investing UK: Understand the Concept of Stock Splitting

What would be your reply in a situation where you have a 100$ bill to pay and someone offered you two bills of 50$ each to pay replacing the original one. Would you accept that offer? This might sound a pointless exercise to some of you but analogy of stock splitting is same. Let’s take a deep look on stock splitting to understand what stock splitting means, why it is done and what it means to investors.

What is Stock Splitting?

Stocks splitting can be understood as a corporate action that increases the number of outstanding shares for a corporation by dividing each share and which indirectly diminishes its prices. However, stock’s market capitalization remains same just like when dividing the 100$ bill into two parts does not change the overall bill to pay. Some of the most common stock splits are 2-for-1, 3-for-2 and 3-for-1.

Let’s take an example, suppose stock A is currently trading at $40 and company has 10 million shares issued. Simply means company is having market capitalization of $400 million ($40 x 10 million shares). Now further, if company decides to implement a 2-for-1 stock split then for each share owned shareholders will receive one additional share, deposited directly into their brokerage account. They will be having now 2 shares for each 1 previously held, but twist is that the price of the stock will also be reduced by 50%, from $40 to $20. You can notice that the market capitalization remains the same – as it has doubled the amount of stocks outstanding to 20 million while in chorus reducing the stock price also by 50% to $20 for a capitalization of $400 million. The true value of the company hasn't changed at all. This is stock splitting.

In an easy way if you want to determine the new stock prices after splitting, divide the stock price by the splitting ratio. Also there is another term i.e. Reverse Stock Splitting and the most common example of reverse splitting is 1-for-10 means that for every 10 shares you own, you will be receiving 1 share extra.

Why it is done?

Now question arises that why stock splitting is done? The first obvious answer is to hit on the psychology of the investors. Another reason that is perhaps more logical one stocks are splitted to increase a stock’s liquidity.

What it means to Dividend Investors? 

Stock splitting is a good buying indicator for dividend investors in UK as it signals that company’s stock price is increasing and a good one to buy at the moment.

Get dividend data for all the stocks listed in FTSE indices( like FTSE 100, FTSE 250 ), on the London stock exchange of UK by dividendinvestor.co.uk. Get data like dividend yield, dividend dates, dividend payout changes, yield%, dividend history, consecutive dividend increase, 52 week high/low data, ex-dividend date etc. Track your favorite dividend stocks in UK By Tracker Tool. Find best dividend yield paying ftse stocks by screener tool.

Related Tags: FTSE 100 Dividend Stocks To Buy : High Dividend Yield FTSE 100 Stocks

 

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UK Dividend Stocks - Why FTSE 100 is Holding Itself Behind the Line?

UK’s benchmarking index of London stock market ftse 100 was up by 0.1%this Boost was because of the strengthening of oil and gas stocks led by Tullow Oil and Petrofac. Tullow oil (XLON : TLW) rose up 2% after it announced that it’s northern Kenya region partner, Africa Oil had found a oil and gas at the Ngamia Well-2. After a strong showing in 2013, expectations with FTSE 100 was higher in 2014 but so far it has disappointed everyone including investors as in 2014 index got 1% gain only. It seems like something is pulling the ftse 100 stock indices back as each time it seems like it will cross the 7000 landmark for the first time, it slips all of sudden and then efforts are made to recover the original position. There may be Psychological Factors related to past as each time ftse has reached near 7000 mark, severe crashes has been followed the British economy. In the year 2000 there was tech bubble and in 2007 economy was suffering with sudden credit deficiency. Because of all those things perhaps not many of the investors want to see the FTSE 100 Crossing the 7000 barrier.

Also, many of the Mega caps haven’t proved themselves popular and more profitable in recent month to investors as compare to many of their small cap peers and this might be a reason why ftse is holding itself back again and again as companies do not want to push it through. Performance of such mega cap stocks are not up-to the level and it’s the mega cap stocks matters a lot in compare to small-cap stocks when it comes to overall index performance. Don’t worry though as FTSE 100 stock indices is seems to recovering again.

If you see the price to earnings ratio (P/E) of the FTSE 100 dividend paying stocks, you will find that for most of the ftse 100 stocks, it is undervalued in compare of ftse 250 stocks. FTSE 100 trades on P/E of 14.2 on an average while FTSE 250 stocks has a P/E of over 19 and S&P trades on P/E of 16. Here I am Mentioning some dividend paying stocks from FTSE 100 indices in UK which you can find most valuable.

HSBC Holdings PLC( XLON : HSBA)

HSBC Stocks appears to be undervalued as it trades on P/E of just 11.2 while the index P/E of FTSE 100 is 14.2 as stated above. During the Credit Crunch Session in UK, HSBC navigated through it successfully than many of it’s other smaller banking peers, but yet company seems struggling to gain some ground this year. Shares are down for 8% year to date returns.

Shell( XLON:RDSB )

Stocks of Royal Dutch Shell remains undervalued in compared to FTSE 100 as stocks trade on P/E of 11.6 in compare of 14.2 for FTSE 100. Stock offers a great degree of reliability than many of it’s smaller sector peers. Also, Shell has a strong cash flow which clearly indicates that it can afford to pay generous dividends to dividend investors each year. Currently shell stocks are generating dividend yield of 4.40% which is quite healthy.

Resource: DividendInvestor.co.uk

Get dividend data for all the stocks listed in FTSE indices( like FTSE 100, FTSE 250 ), on the London stock exchange of UK. Get data like dividend yield, dividend dates, dividend payout changes, yield%, dividend history, consecutive dividend increase, 52 week high/low data, ex-dividend date etc. Track your favourite dividend stocks in UK By Tracker Tool. Find best dividend yield paying ftse stocks by screener tool. 

Related Tags: FTSE 100 Dividend Stocks To Buy : High Dividend Yield FTSE 100 Stocks  

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