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Overdue for a split?
THE MOTLEY FOOL
Ask the Fool
Published: March 12, 2020
Q: Why hasn't Amazon.com split its shares recently? Is it due for a split soon? -- G.K., Ocala, Florida
A: The company "went public," issuing shares on the stock market for the first time via an initial public offering (IPO), back in May 1997. It split its stock three times soon after, splitting 2-for-1 in 1998 and 3-for-1 and 2-for-1 in 1999. In the 20-plus years since then, there have been no splits. In early March, its shares were trading around $1,954.
But the number of shares a stock has isn't too significant on its own. Two companies may each have a market value of $50 billion, with one having 1 billion outstanding shares priced at $50 apiece, and the other having 250 million shares priced at $200 apiece. A company's market value is far more meaningful than its number of shares. And Amazon's market value has soared, recently topping $1 trillion.
It won't be surprising if Amazon splits its shares in the coming years, if only to make them more affordable for average investors. If you wanted to invest $1,500 in Amazon and shares are trading for $2,000 apiece, you couldn't afford a single share. But if, say, the company split its shares 20-for-1, shareholders would suddenly have 20 shares for every share they owned pre-split, and those shares' prices would be reduced proportionately (leaving the total value of their holdings unchanged). In such a split, shares costing $2,000 pre-split would sell for around $100 post-split -- and someone with $1,500 could afford to buy 15 shares.
Q: What's the Pension Benefit Guaranty Corporation (PBGC)? -- T.L., Mankato, Minnesota
A: It's a federal agency that insures benefits in private traditional pension plans. Learn more at PBGC.gov.
Fool's School
The Stock Market Has Plunged -- Now What?
In late February, the United States stock market took a bunch of blows, as -- among other things -- investors worried about the impact of the novel coronavirus on the world economy. The S&P 500 was down more than 10% at one point, and may be down more by the time you're reading this.
It's jarring to see investments plunge in value by 10%, 20% or even more. (The U.S. stock market, as measured by the S&P 500 index, dropped a whopping 38% in 2008!) But should you freak out? Not if you're a long-term investor. Remember -- this is how the stock market works. Indeed, since 1950, the S&P 500 has dropped by 10% or more dozens of times. It tends to happen every couple of years.
Sometimes such events are short-lived; other times they mark the beginning of a recession that can last several years. Still, every decline in the past has been followed by an eventual recovery, and the stock market has gone on to hit new highs.
Superinvestor Warren Buffett has explained why savvy investors aren't rattled by market downturns: "If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the (stocks) they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." (Ideally, they'll have some cash on hand with which to snap up great stocks at bargain prices.)
If this short piece isn't enough to calm your nerves, spend a little time reading some classic books on investing. Look for titles by John Bogle, Peter Lynch, Joel Greenblatt, and The Motley Fool's David and Tom Gardner.
My Dumbest Investment
Not Rothing It Sooner
My dumbest investment move was not utilizing the Roth portion of my 401(k) account earlier. A Roth 401(k) grows tax-free! That would have been a big-time win for me if I'd started investing in a Roth 401(k) with my company at 22 years old -- I'm 32 now. Take advantage of the Roth option. -- K.M., online
The Fool responds: You're right that a Roth 401(k) -- and its cousin, the Roth IRA -- are powerful tools for retirement savings. You're also smart to be thinking about retirement while you're just in your 30s; many people don't get around to that until a decade or two later, and they lose out on massive saving potential.
The longer your money has to grow, the more it can grow. Still, it's far from too late for you. If you're aiming to retire at, say, 62, you still have a whopping 30 years of investing and growth ahead of you.
With a Roth IRA or 401(k), you contribute money and get no upfront tax break. But if you follow the rules, you can withdraw money from the account later, tax-free. That's especially great if you expect your tax rates to be higher in retirement.
Socking away $8,000 per year for 30 years and earning an average annual return of 8% can get you to almost $980,000. Learn more about IRAs and 401(k)s at Fool.com/retirement.
Foolish Trivia
Name That Company
I trace my roots back to the 1849 beginning of pharmaceutical giant Pfizer -- the parent from which I was spun off in 2013. Today, based in Parsippany, New Jersey, I'm a world leader in animal health, offering health products such as drugs and vaccines for house pets, horses, cattle, swine, sheep, poultry and even fish. I employ more than 10,000 people and sell my wares in more than 100 countries. I have about 300 product lines and rake in over $6 billion annually. My unusual name is related to the words zoo, zoology, zoometry and zodiac. Who am I?
Last Week's Trivia Answer
I trace my roots back to the 1866 founding of the Anglo-Swiss Condensed Milk Company and the development in 1867 of a baby food made with flour and milk. I grew over the years and added offerings such as chocolate. In 1938 I introduced a popular instant coffee, followed by instant tea in 1948. Today, based in Switzerland, I sport a market value that recently topped $320 billion. The brands I own or am licensed to sell include Gerber, Cerelac, Perrier, Poland Spring, Cheerios, KitKat, Coffee-Mate, Smarties, Maggi, Hot Pockets, Stouffer's, DiGiorno, Lean Cuisine, Carnation, Dreyer's and Haagen-Dazs. Who am I? (Answer: Nestle)
The Motley Fool Take
Good Years Ahead for Goodyear?
Goodyear Tire & Rubber (Nasdaq: GT) has been on a bumpy ride lately, but there may be plenty of good years ahead for the company. Goodyear is one of the world's largest tire companies, with 47 manufacturing facilities in 21 countries; world-class innovation centers (including its innovation lab in Silicon Valley); and around 5,200 patents globally.
A plateauing and slowing North American light-vehicle market has pumped the brakes on Goodyear, with lower vehicle production shrinking demand for tires. And its operation in China may be affected by the COVID-19 epidemic. But that's only part of Goodyear's story.
After all, Goodyear still gets significant revenue through its replacement tire business -- as all existing cars occasionally need new tires. Also, more and more vehicles sport wheels with diameters of 17" or more, which require tires that are far more profitable than those for smaller wheels. Meanwhile, if oil prices fall, so will the raw material prices for tires, boosting profit margins.
Goodyear has recently been trading at a forward price-to-earnings (P/E) ratio of around 6, which is very low, and its dividend was recently yielding a hefty 6.6%. That warrants a closer look by long-term, income-seeking investors. Weak auto markets are generally followed by stronger ones, and while you wait, Goodyear should keep paying dividends.
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