Wednesday, May 18, 2011

Reverse stock splits, part deux

A few days ago I blogged about reverse stock splits and Duke Energy's planned 3:1 reverse split.  I was quoted in an article in the local paper saying that:

"If (Duke officials) thought their stock had really good prospects, they wouldn't do this."
Today, the Director of External Relations for Duke published a letter in the paper rebutting the article.  I've taken the liberty of quoting the letter in full here.

Your May 13 article "Utilities' stock split puzzles investors," about the reverse stock split planned following the completion of our merger with Progress Energy, wrongly mixed apples and oranges when it discussed Duke Energy's stock performance with the price of the company's plans to do a three-for-one stock split.
Duke Energy's planned reverse stock split is intended to address our high number of outstanding shares, which occurred as the result of doing several major mergers and acquisitions over the past 15 years. It will also put our company's stock price more in line with our industry peers. It has nothing to do with what you printed, without specific attribution, that our company's stock performance was lackluster. In fact, Duke Energy's stock recently reached a 52-week high. Our performance has exceeded our industry peers (in the Philadelphia Utility Price Index that tracks the top utilities in the U.S.) and S&P 500 over the last one, three and five years.
Twelve months ending May 13, 2011, Duke Energy's total shareholder return was 20.5 percent, the utility index was 16.7 percent and the S&P was 17.9 percent. The past three years, Duke's total return was 22.8 percent, the utility index was negative 3.2 and S&P was 1.9. The past five years, Duke's total return was 51.7 percent, the utility index 31.4 percent and the S&P 15.1.

A few of comments: First the past performance of Duke stock is not relevant to the discussion of the motivations for a reverse split.  Second, no one said that Duke's past performance was lackluster.   In fact companies that have seen strong stock performance often engage in stock funded mergers because, in effect, their currency is highly valued.  Third, as a finance researcher I am interested in generalizations about how stocks do rather than specifics about individual stocks.  The data pretty clearly shows that stocks that do reverse splits on average underperform after the split.  This doesn't mean that Duke will do poorly, it just means that if Duke Energy continues to outperform it will be "the exception that proves the rule".   But in the end only time will tell.