On April 2, search giant Google Inc. (Nasdaq: GOOG, GOOGL) unveiled a stock split – a 2-for-1 reapportionment that halved the price of the “Thousand-Dollar Club” GOOG stock, meaning you can now snap up shares at a more affordable $530 each.

Retail investors usually love when a “name-brand” stock announces a split – even though academics typically dismiss the move as a “book-keeping” maneuver with little impact on the underlying profit opportunity.

[ad#Google Adsense 336×280-IA]But in the case of GOOG (and Apple, which also recently announced a stock split), it’s the investor – not the expert – who has the right take.

Today I’ll explain why.

And I’ll also show you how the GOOG stock split can give your investment portfolio a nice lift.

The GOOG Stock Split

Over the last year, we’ve talked a lot about the difference between a stock’s sticker price and its value.

As I have said many times, a high-priced stock that gains 50% is cheaper in the long run than a penny stock that gains only 20%.

GOOG stock Now, Google isn’t that kind of high flyer, but it’s a quality stock with rock-solid fundamentals. It’s one of my all-time favorite tech stocks, in fact.

Before we talk more about the specifics of the Google transaction – and look at how it can help you – let’s first take a look at stock splits in general.

First, to be absolutely clear, a stock split does not affect the market cap of the stock or any of the metrics we typically use to analyze the stock.

For instance, say that XYZ Software Corp. has been trading at $100 a share and then splits its stock 2 for 1. That means there are now twice as many shares of XYZ on the market, and they cost $50, not $100. Now, $5,000 buys you 100 shares instead of 50 shares.

You will have invested the same amount, but the entry price is much more attractive.

In essence, companies split their shares to boost the “liquidity” – Wall Street jargon for boosting the shares’ allure and increasing their tradability. Cutting the price down makes the stock more attractive to average investors who don’t have millions to throw around the way hedge-fund managers or high-frequency traders do.

And there is a tangible benefit – for the company, and for investors shrewd enough to move in and capitalize.

Here’s how it all breaks down, and why it’s so huge for investors…

Stock Splits Pack a Punch

History shows that stock splits are an excellent deal for shareholders. Investors perceive that company executives are very bullish about the firm’s future and often begin piling into the stock, increasing its return.

That’s just what business professor and noted market analyst David Ikenberry discovered. He did two studies on stock splits covering 20 years’ worth of market data.

Ikenberry concluded that stocks that split beat the market by an average of 8% in the first year and at least 12% over the next three years.

That may not sound like much at first glance. But a 12% annual premium means you would double your returns compared to the overall market in just six years.

One interesting note from Ikenberry’s research: CEOs often announce splits at the same time as great earnings news, a fact that gives the stock an extra boost.

Just look at Google.

The GOOG stock split was initially announced back in April 2012 – at pretty much the same time it reported a 61% increase in quarterly earnings.

From the time of that announcement until the split actually occurred on April 2 of this year, Google’s share price zoomed nearly 80%. That’s just about double the return of the Standard & Poor’s 500 Index over the same period.

That’s a life-altering outperformance.

So knowing that the split will help supercharge its gains going forward, let’s now take a look at why I remain high on Google, viewing it as a fantastic company and value-filled stock.

The Ubiquitous Google (Nasdaq: GOOG)

When a company’s name becomes part of our daily lexicon (we now say “I’ll Google it” when we’re going to do an Internet search), you know that a company has market power. Google remains dominant – the world’s No. 1 Internet search engine – with control of roughly two-thirds of the market. But the company has greatly extended the range and impact of products and services.

The company is behind the Android operating system that powers most of the smartphones and tablet computers sold in the world today.

According to the market researcher IDC,1 billion smartphones were shipped globally last year. Of those, nearly three-fourths were powered by Android.

At the same time, the company is pushing the boundaries of wearable tech with Google Glass. It has also moved heavily into robotics, snapping up a series of firms over the last two years. And Google continues to push the boundaries of robotic cars, so far racking up more than 2 million test miles.

This is a company run by visionary leaders and blessed by patient investors who know how to look beyond Wall Street’s obsession with quarterly numbers. Not that the numbers are bad – not by a long shot.

With a market cap of $363 billion, GOOG has operating margins of 23% and a return on stockholders’ equity (ROE) of nearly 15%. I expect Google to grow its earnings per share (EPS) this year by 21%, a rate at which profits would double in about 3.5 years.

So, while Google remains a “high-dollar” stock in the mid-$500s, you now can feasibly buy a few chunks of GOOG stock. And remember: A double on $1,000 invested in a $500 stock results in the same amount of money as a double on $1,000 invested in a $10 stock.

Thus, Google represents the kind of foundational play that I enjoy telling you about. I want you to have a solid base in your portfolio so you can steadily increase your net worth. And the GOOG stock split makes it cheaper – even as it boosts the returns we can expect going forward.

— Michael A. Robinson


Source: Money Morning