Following a display of dissatisfaction with the declining share price by shareholders in the company’s annual meeting, CME Group Inc. (CME - Free Report) announced a five-for-one stock split last Thursday, with the intention of boosting trading volume. In order to implement the stock split, the company will give a 400% stock dividend to its shareholders. The dividend will be paid on July 20, to shareholders of record as of July 10.
While a stock split will not directly impact share value, it will make shares more affordable. This in turn will likely boost demand, which will then drive the price upward. Affordable prices will also diversify the investor base of CME, which currently has mostly large institutional investors.
Investors’ concerns are justified, given the substantial decline in CME’s trading volume as well as share price. On Thursday, the company’s trading volume was 495,100, down 28% from 688,100 a year ago. Moreover, the share price also witnessed an 8.5% decline from May 24, 2011 to close at $256.16.
Management believes that CME’s recently acquired ‘systemically important’ designation is also partly responsible for the recent decline in share prices. Systemically important financial institutions are subject to higher scrutiny and regulation than others, which sparked unwarranted investor concerns that the company would have to raise fresh capital to fortify its business.
Last week, the Financial Stability Oversight Council assigned the systemically important status to CME’s clearing house – CME Inc. – as well as ICE Clear Credit, the clearing house owned by rival IntercontinentalExchange Inc. (ICE - Free Report) .
The announcement of the stock split has boosted investors’ confidence in the stock, leading to a 1.1% increase in CME’s share price on Thursday to $256.16.
CME currently carries a Zacks #4 Rank, which implies a ‘Sell’ rating for the short term.