A Split Decision on Stock Splits, Such As Apple's (AAPL)

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In early June, Apple executed a 7-for-1 stock split, temporarily frightening some less-than-savvy investors who saw the company’s share price seemingly plummet overnight. The company’s decision also ignited a healthy debate about the possible motives behind its unusual move.

Anatomy of a Split

Typically, companies will execute a 2-for-1 or 3-for-1 split. In the case of a 2-for-1 split, each investor would get one additional share for every share in their portfolio. With twice as many shares now on the market, the share price would be cut in half.

With Apple’s 7-for-1 split, 861 million pre-split shares valued at roughly $650 each gave Apple a market cap of around $559 billion. By comparison, on Monday, June 9, Apple’s 6 billion post-split shares valued at around $94 gave Apple a market cap of about $562 billion. The slight improvement was the result of a good day for the stock.

In the end, a stock split has no immediate impact on the value of a company or on an investor’s holdings. If you held 100 shares of Apple stock as of June 2, you now own 600 more.

But the big question for investors going forward is whether Apple will be a better-performing stock. The company’s shares have rebounded sharply in the past several months, but are still below the record level they set in 2012. Apple shares are traded on the Nasdaq under the symbol AAPL.

Purpose of a Split

There are a few different reasons why a company might execute a stock split. Apple CEO Tim Cook stated one reason outright: “We want Apple stock to be more accessible to a larger number of investors.”

Psychology is at play here: It’s hard for some investors to stomach spending nearly $700 for just one share of a company’s stock. But at a post-split price of less than $100, Apple now appears more affordable, even though investors are now getting a smaller piece of the “iPie” with each share.

The fact that regular Joes like the looks of the split means Wall Street will too, as the phrase “larger number of investors” translates into Street speak as “more money.” New investors are attracted by the appearance of a low price, they buy shares, the price goes up, gains are used to buy “iDevices,” and the circle of commerce turns another day.

Indeed, studies have shown that stocks tend to perform well following a stock split. One study showed 8% additional growth in the first year following a split and 12% in the next three years. It’s also typically believed that companies split their stock as a way to show the market the gains they’ve made and, hopefully, point to more to come. Simple enough, right?

But Not For the Oracle of Omaha

Not everyone believes in the stock split as a means to spur growth. A prime example is Warren Buffett’s Berkshire Hathaway. Berkshire’s stock has never split since going public and is currently priced north of $190,000 per share, not exactly a price that’s “accessible to a larger number of investors.”

Contrary to Apple’s desire to attract more investors, Buffett has said he won’t ever split the stock because he wants long-term investors. (He did split shares of Berkshire’s class B stock, though he did so reluctantly and only to facilitate a corporate buyout.) Buffett not only sees through the psychological slight-of-hand of a stock split, he sees it as a danger to the stability of his company. Where Apple sees more investors and more liquidity, he sees increased speculation and more volatility.

Notably, even Cook said in 2012 that he and Apple’s board would not split the stock, then trading at around $500 per share, arguing that such action would “do nothing” for shareholders. The question of why Cook and Apple made an about-face with the recent split has some observers wondering about other motives.

Above the Average

Apple may have its sights set on being added to the Dow Jones Industrial Average, a 30-stock bellwether index that counts among its ranks such elite blue chips as Microsoft, Intel, Goldman Sachs and Chevron.

It seems natural that the most valuable U.S. company would be included in the Dow, but its high stock price may have been keeping it out. That’s because the Dow is price-weighted, meaning companies with higher share prices have more influence on the average as a whole.

According to one widely cited analysis, companies tend to outperform the broader market by 3% in the first month after being added to the Dow. But 3% is chump change to a company like Apple, which has done quite well in the growth department without the Dow’s help. There is still the prestige factor, but again Apple has cultivated plenty of prestige on its own. So it’s hard to think Apple’s split was primarily done as a bid for Dow inclusion, if at all.

As Usual, Only Apple Knows What Apple’s Up To

In the end, much like the future iPhone 6, 7 and 8, we may just have to wait and see what exactly Apple is up to with its latest move. We can almost imagine Apple co-founder Steve Jobs, who died in 2011, smiling coyly on stage during a product announcement before unveiling “one more thing.”

In the final analysis, of course, Apple’s future success – and the course of its widely traded shares – will hinge more on its ability to bring amazing products to market and less on its stock machinations.

That’s a simple fact of business that Jobs understood all too well.

John Stephens is a Los Angeles-based writer and editor. He covers banking and finance for NerdWallet and spends his spare time collecting pudding labels to accrue airline miles. Follow him on Twitter: @ItsJohnStephens



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks , Business , Investing Ideas

Referenced Stocks: AAPL , BRK/A , BRK/B

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