Wednesday, October 26, 2005

The Joys of Serial Splitting

With increasing amounts of academic brain power and graduate student slave-labour turning their efforts towards finding systematic explanations for momentum in the cross-section of returns, decreasing amounts have been focused upon the venerable and puzzling anomaly that still flourishes, particularly in Japan: stock splits. While recent research has purportedly debunked some parts of the anomaly (e.g. "stealth" signalling of future propsects, longer-term post-split outperformance), a surreal interlude remains between the announcement date and the date when the new line of shares are delivered whence it still appears abnormal returns exist. Surely this must be of some benefit to someone if not to stockholders even if it is fleeting & temporary. But as Bob Dylan eloquently asked: "...why and what the reason for?"

Stock splits have a cherished history in Japan, the vestiges which, despite the recent (last 10 years) subdued appetite of the public for equities as an asset class, is imprinted upon the memories - and thus the reactions - of the now-electronic herd. In the heady days of the "great bull", they were often referred to as "Bonus Issues". Other companies awarded their shareholders "Stock Dividends". Still others lavished their owners with "Gratis Shares" - the nomenclature all implying that management was gloriously magnanimous, and that shareholders were somehow miraculously better off (if nmot wealthier) than they were before the ex-date. This assumption, of course, should not be dignified with a rebuttal other than to suggest that in many cases, one would be forgiven for suspecting that management had other, less-than-salubrious motives in mind. For the alternative explanation, that they were/are simply as ignorant as their shareholders, is I daresay, a grim and petrifying thought given that the recent inflows into Japan over the past decade have left "us" (i.e. Gaijin collectively) as significant "partners", having seen value where "they" (Japanese investors collectively) have not. This may not be symptomatic of their [undeserved?] low opinion of themselves and their companies, as much as it might reflect that over the "lost decade" they've busily kept investing in plants & equipment that make things and exporting them, while we've been busily doing what we do best which is making money. Unfortunately we've not been "making" it in "old-fashioned way" preferred by SmithBarney spokes-thespian John Gielgud, but just simply "producing" it, or more specifically, printing it, in optimized methodical assembly-line fashion descended from Ford, Taylor and the Model-T'.

Going back to the subject, there is nothing inherently "wrong" with a stock split. And accusations of misunderstanding or deceptive practice would certainly exclude those successful firms who've grown over the years and, as a result, have seen their share prices appreciate and who now desire to "keep their shares affordable, or "broaden their investor base" or both. In themselves these are entirely defenesible justifications since a board-lot (the minimum trading unit often 1,000) of shares in Japan is inflexible and may make small purchases untenable. Scrutiny, however, should be focused upon "Splitters" and even more so upon "Serial Splitter", whose share-prices have pole-vaulted dramatically above earnings, but whose absolute levels are not themselves impediments to the more noble objectives such as broader ownership. Here, one might not be off of the mark if one suspected that these managers might be trying to obscure the price/value relationship by splitting their shares frequently (and possibly) to excess. In other words, trying to pull the wool over their eyes. How does this work? Shocking as as it may sound to the professional tape watcher or daytrader, many ordinary investors DO actually have lives outside the stock market (and professional sports). They go to the movies. Tend their gardens. Crochet. Trainspot. Whatever. They may be watching a stock at YEN1000 which undergoes a 3-for-2 split that could very easily elude observation (especially by the trainspotter). Now, at YEN666 (spooky, huh!) it appears "cheaper" and more enticing than it was. Sad, but true.

The question that I have been ruminating upon of late is: If a little splitting is good, can too much a of good thing be bad? Why display restraint at all? Why not split a lot? Or why not split more often? Or better yet, why not both? It didn't take long to locate such an example because precisely the same thought must have occurred to the father & son loan-sharking team (I'm sorry, the PC term is Unsecured Credit Provider) team headquartered in Shinju-ku that control NISSIN CO. LTD. (TSE Code #8571). The table below summarizes their prolific exercise in share miniaturisation. With a listing in 1994 at a higher than average price, the first split in 1996 might be excused. But why not do a 2-for-1 at that time rather than a second one a few months later? It is possible that the Sakioka-the-Younger studied finance at University (after all, Dad IS a money-lender) where he learned of the anomalous reception that stock splits receive and set out a pre-meditated plan to elongate the halo effect. I am sure a publisher is chasing the rights to his "kiss & tell" as I write this.

Ex-Date Split NumShares
Ratio (Base100)
Mar 1996.........13-for-10 ............ 130
Sep 1996 .......... 6-for-5 ............. 156
Mar 2001 .......... 3-for-1 ............. 468
Mar 2002 .......... 2-for-1 ............. 936
Mar 2003 .......... 2-for-1 .......... 1,872
Mar 2004 .......... 2-for-1 .......... 3,744
Sep 2004 .......... 2-for-1 .......... 7,488
Mar 2005 .......... 6-for-5 .......... 8,985
Sep 2005 .......... 2-for-1 ........ 17,971

A breather was taken during the depths of the bear, before sharpening their guillotine for a more ambitious 3-for-1 in 2001. One might speculate that an increasing environmental concern and consequential desire to to save paper caused them to restrain themselves to a split a year in 2002, and 2003, but the exercise in financial confetti-ization accelerated with more precision knife-work slicing them four more times in the past two years! It was rumoured this has left shareholders at the last AGM exclaiming screaming "Four more splits! Four more splits!" reminiscent of the demagoguery of the Republican platform at the 2004 RNC.

If only share splits created shareholder value, then the Sakioka's would be legendary! This is NOT to denigrate their money-lending prowess (which is not a badge of honor in Japan since it is a less-than honorable profession), for no one can deny that they have grown their business nearly five-fold over the course of a decade where most enterprise have been fortunate to escape nominal sales DESTRUCTION. And shareholders have been rewarded with hefty increases in EPS DESPITE the massive and unprecedented growth in the number of shares ourstanding - now surpassing 1.3 billion on an Oct 1 price of ~YEN150. With a Bloomberg, and an MBA, it is undoubtedly easy to keep track of what should be mere book-keeping entries, but one should be sympathetic to the plight of the average investor who has been blind-folded and spun-around in a disorienting way by the continual julienning of the shares into ever-smaller morsels. But my question is "Why" have these financial Chefs embarked upon this relentless savaging of their share certs. when it is by no means an endeavor free from risk?

For example, low price stocks exhibit higher specific variance. And many institutional investors (and some indices) have minimum share price thresholds - both which could prove costly under darker circumstances. On the other hand, share turnover and volume HAS increased rather dramatically. Perhaps the Sakioka's figured out that there is undiscovered value in the "free" advertising that comes with being on the most actively traded list every day? If this proves to be true, Nissin could be on the vanguard of an important trend as they bizarrely duke it out with every other TSE-listed firm in what would be the world's first national fight for the LOWEST share price. It could also be that in a sector (Consumer Finance) that boosts very high average share prices, they are hoping that at least some investors will opt for the illusion of the "bargain" or low-priced stock. Not lowly-rated. Not temporarily lowly-rated. Not formerly high, but now [temporarily low], but just low-priced. Cognitive errors know few boundaries in bizarre world of Japanese finance and Fidelity and Goldman Sachs are two of Nissin' largest non-Sakioka shareholders. (Legal disclaimer: The placement of these apparent non-sequitirs in the same sentence is entirely by accident -Ed.). Or they may simply be very bullish on the future and hope to "grow into" their now-immense number of shares out. The jury remains out. But having intimately witnessed (and played a role) in the ups and downs of share prices in Japan over the past two decades, and knowing that there few free-lunches to be had without Faustian bargains, I must admit to being somewhat underwhelmed and suspicious of management's intentions in addition to being skeptical that they will be able to continue to bestow such "freebies" upon their investors before soon having their shares quoted in single digits. Did I hear someone mention "reverse-split"?

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