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Like the diversification of mutual funds but not the fees and taxes? Try FOLIO investing and easily buy portfolios based on indices, sectors or any group of stocks you like, even the Money 30. Take advantage of our HALF-PRICE Offer for Money Readers. CLICK Below http://www.foliofn.com/content/lp/lp.jsp?id=monyem00031000y ***************************************************************** SIVY ON STOCKS from money.com November 24, 2000 Frequently asked questions Is it bullish if my stock is added to the S&P? Can stock splits and buybacks increase total returns? What should I do with a spinoff? By Michael Sivy Q: Does being included in an index like the Dow or the S&P 500 increase a stock's returns? A: Just being in an index doesn't have much long-term effect. But stocks typically receive a quick boost when they're added to a major index and go down a little when they're kicked out. That's because many mutual fund managers tie their performance to the Dow or the S&P 500, leading them to hold many of the same stocks. As a result, money managers frequently load up on new additions and dump stocks that are removed. Q: Are stock splits good for shareholders? A: Studies confirm that splits are good for share prices. According to one study, stocks that split two-for-one outperform the market over the following year by an average of four percentage points. That may not seem logical, since a split has no fundamental impact on value: You simply get more shares that are worth proportionately less. But there are explanations for the outperformance. By reducing the share price, splits make it easier for small investors to buy 100-share round lots, boosting demand for the stock. In addition, no company wants to split its stock and then watch it crash. So a company's top managers aren't likely to authorize a split unless they are optimistic about the future. Of course, management confidence means more for blue chips than for start-ups, which may well disappoint even their own insiders. Q: How beneficial are stock buybacks? A: Companies that regularly buy back their own shares can outpace comparable stocks by as much as three or four percentage points a year, on average. In simplest terms, buybacks ensure that earnings -- and earning increases -- are divided among a smaller number of shares. As long as the cost of the buyback is less than the benefit of shrinking the number of shares outstanding, earnings per share will rise. As a result, buybacks are most effective when a company has at least 12 percent annual growth and a P/E below 20. Of course, those are the same characteristics that conservative growth investors look for (see "Investing for growth" [ http://www.money.com/money/depts/investing/sivy/archive/001009.html ]). So you should first choose stocks based on fundamentals, and only count buybacks as a bonus. Two cautions: Buybacks of high-priced stocks may not help much. And not all companies that announce buybacks actually follow through and repurchase shares. Q: Should you hang on to a spinoff? A: When a large corporation spins off some of its operations as an independent firm, the new stock may fall in the first month or so. Reason: Many existing shareholders who receive a spinoff dump it. Index funds, for example, won't hold it if it's not in their index. And individual investors may sell because the company doesn't fit their investing style. Following the initial dip, however, spinoffs often go on to be stellar performers. In fact, one study found that spinoffs outperform comparable stocks by as much as 20 percentage points over the first 18 months. If you own a stock in a company that is going to grant you shares in a spinoff, it may be smart to wait at least a year before selling the new shares. On the other hand, if you aren't a shareholder and the spinoff is a stock you'd like to own, consider waiting until after the initial dip. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ Earning Releases and Calls For the latest corporate earnings releases and online conference calls click on: http://money.ccbn.com * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! Sign up for a RISK-FREE issue of MONEY MAGAZINE at http://www.money.com/subscribe2 Or if you prefer call our toll-free number 1-800-544-4594 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * We may, from time to time, contact you with offers for Time Inc. products and services which we think may be of interest to you. If you would prefer us not to contact you in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletters, please let us know by sending us an e-mail at <no_solicit@money.com<. Additionally, from time to time we may provide your e-mail address to carefully chosen companies whose offers we think may be of interest to you. If you would prefer us not use your e-mail address in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletter, please let us know by e-mailing us at <no_transfer@money.com<.
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