Stock splits ruled headlines in 2020, with Apple and Tesla setting the tone. A rally in share price is the biggest catalyst for companies to split stocks, and that's exactly why the board of Canadian Pacific Railway (CP 0.70%) just proposed a 5-for-1 stock split.
Highlighting the run-up in Canadian Pacific's stock price in the past five years, CEO Keith Creel said, "We believe that the share split will encourage greater liquidity for CP's common shares and provide opportunities for ownership by a wider group of investors than is currently available."
Image source: Getty Images.
Because a stock split lowers the absolute price of each share, more investors typically find a stock affordable afterward. Though even that may not hold as much today when one can buy fractional shares.
So in Canadian Pacific's case, a 5-for-1 split would mean each shareholder will get 4 additional shares in the company for each share held on the record date. At the same time, Canadian Pacific's stock price will be reduced accordingly, so an existing shareholder's investment value should remain the same.
Canadian Pacific will seek shareholder approval for its proposed stock split at its annual meeting, scheduled for April 21, and it will likely win given the large run-up in the stock price in recent years. Canadian Pacific has been among the best performers in the railroad industry.
Investors often get excited about stock splits, but that shouldn't be the case, since they don't change the value of an investment, nor do they reflect any change in the underlying company's fundamentals. If a stock jumps post-split, it's purely psychological.
Canadian Pacific investors may want to focus instead on the other update from the company: It has initiated a program to repurchase roughly 2.5% of its outstanding shares. "CP's ability to generate strong free cash flow and the pipeline of opportunities in front of us give us the confidence to launch this new share buyback program," Creel said.
The railroad has consistently repurchased shares and increased dividends since 2014, reflecting management's commitment to shareholder returns. Last July, the company increased its dividend by a solid 15%.
Shareholders can expect another strong hike in coming months, what with the railroad giant projecting adjusted EPS growth in at least the mid single digits for full year 2020. With Canadian Pacific's fourth-quarter and full-year 2020 numbers slated for release today after market close, keep an eye out.
