What can a community bank do to make its stock price more attractive?
The obvious answer seems to be "earn more." Over time, the price of any equity has to reflect what the company is earning and is likely to earn.
But as the economist John Maynard Keynes once said, "In the long run, we are all dead."
In the short term, earnings and price need not correlate. Frequently, in fact, they go in opposite directions.
A bank can do several things to help its stock move up. Of course, steps that just hype the stock temporarily are worse than nothing; those who buy the stock or get options when it is artificially high will not be happy campers. But there are useful actions of permanent value.
These include working with securities dealers who set the price, so they will be more willing to position and recommend your bank's shares. This involves giving them accurate and timely information on the bank, letting them handle all trades instead of holding back the lucrative blocks for private sale, and developing programs like dividend reinvestment so the market maker is assured there will be some buying demand every quarter.
Since the market maker is tying up his capital in your shares and can be badly hurt in a down market, that last step is most important. It shows that there is some light at the end of the tunnel-that is, the bank will be buying shares regularly at market prices.
You could also pay more attention to the price your stock is at today. If it is $60, is there value to a 2-for-1 split?
You bet! Professionals report that the typical investor likes to buy stocks that sell for $10 to $25 a share.
"Most of my customers like to buy round lots of 100 shares, and they also can't usually afford to pay $6,000 for a trade," is how one market maker explained it. "So if there is a stock split and the stock now sells at $30, buying activity will expand."
So a small stock dividend builds up liquidity and can usually be slipped in without the stock's dropping in price to reflect the dilution.
We may smile when we hear shareholders say, "My bank pays 9% a year-5% in stock and 4% in cash," yet in reality the investor usually ends up 9% better off under this approach. Again, the market is working with a more liquid stock as the new pieces are often thrown on the market by the recipient.
There is a further reason to manage the price to keep it at attractive levels through splits and stock dividends. As bank consultant Robert Kafafian, executive vice president of Lancaster, Pa.-based Hopper Soliday & Co., points out:
"Many community bank executives formerly didn't care about the price of their stock or its liquidity. Most shareholders never cared about stock price, just as long as the cash dividends remained in an upward trend.
"Now however, shareholders-especially holders of large blocks-see similar-size banks selling out for attractive prices, and they become restless if their shares do not move in price. And shareholder restlessness is something no CEO wants to experience."
So bank officers and directors are looking at share-price levels, splits, and stock dividends as being far more significant than simply changing a $10 bill for two fives. Rather, these moves can help the bank achieve buoyancy in stock price.