The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
In just a few months, shares of Apple will cost a lot less for the average investor than they do right now. But the stock will not be cheaper.
Apple (AAPL) announced on Wednesday that it is splitting its stock 7 for 1 at the start of June. That means that if you own one share of Apple right now that trades at about $564, you’ll wind up with 7 Apple shares fetching about $80.57 a piece following the split. Apple is simply flooding the market with more shares at a lower price.
The size of your investment does not change. The split means nothing for Apple’s earnings or revenue and doesn’t impact its balance sheet.
And the market value of Apple (like the titular song in Led Zeppelin’s first track off of “Houses of the Holy”) remains the same as well.
Apple CEO Tim Cook even pooh-poohed the idea of a split a few years ago.
But the stock split, coupled with some other good news from Apple’s most recent earnings report, might actually be good news. Shares of Apple surged 8% Thursday as the company said that profits and sales beat analysts’ forecasts. Apple also increased the size of its share buyback program.
(For the record, I still think Apple is one of seven lucky tech stock bargains that should hold up well even the Nasdaq continues to convulse like it did a few weeks ago.)
Still, why would a move that artificially pushes the price lower be something to cheer? Isn’t it just a case of financial engineering?
Yes. But stock splits do often send an important psychological message.
It could be a sign that the company wants more so-called “retail” investors (a bit of jargon for market aficionados who are not in the 1%) to be able to buy shares.
This isn’t the first time Apple split its stock. The last time it did so was in February 2005. That was a mere 2 for 1 split. And it knocked the price down from the mid-high $80s range to the low-mid $40s. Apple’s stock clearly continued to do well after that.
In fact, there are numerous academic studies that show that shares of companies that announce stock splits tend to outperform non-splitters over the next several years.
(If you’re interested, here are two noteworthy ones in from the mid-late 1990s co-authored by financial professor David Ikenberry: “What Do Stock Splits Really Signal?” and “Underreaction to Self-Selected News Events: The Case of Stock Splits.” Ikenberry, who was a professor at Rice University at the time and is now dean of the Leeds School of Business at the University of Colorado Boulder, has studied this topic extensively.)
And there are numerous recent examples of other companies with sticker shock stock prices that have done well after they lowered their stock prices via splits.
Warren Buffett’s Berkshire Hathaway (BRKA) famously trades at a six-figure stock price. That’s not something us mere mortals can buy. And the Berkshire B shares also used to trade at a lofty price before the company finally decided to split that stock 50 for 1 in 2010 following Berkshire’s acquisition of railroad Burlington Northern Santa Fe.
Berkshire B shares (BRKB) were trading at about $3,500 apiece before the split. The split pushed the price down to about $70. Berkshire B shares hit an all-time high on Wednesday and now trade for around $127.
Tech stock trader Sean Udall reminded me via Twitter that Chinese search engine Baidu (BIDU) did a 10-1 stock split a few years ago as well.
Baidu was trading around $70 immediately following the split. The shares have more than doubled since then.
Now there are some reasons to question why Apple is doing the split now. The stock isn’t as pricey as it used to be. One could argue (with that perfect 20/20 hindsight of course) that a split would have made more sense back in 2012 when shares were trading at their all-time high — above $705.
One theory is that Apple is just angling to finally get added to the Dow Jones Industrial Average. Apple, despite being the most valuable company in the U.S., is not in that venerable index. And it’s mainly a function of its stock price.
The Dow, unlike the SP 500, is price-weighted. So adding Apple to the Dow with a price above $550 would mean that Apple would have an inordinately large impact on the average. The split solves that problem. Apple, barring a remarkable surge back to its record peak in the next month, would have a price in the double digits once it splits.
And even if Apple did get back to above $700 (i.e. more than $100 post-split) that would not be a problem for the Dow either. There are currently 8 other Dow stocks with a price above the century mark. Goldman Sachs (GS) and Visa (V) — two of the Dow’s most recent additions — trade for more than $160 and $209, respectively.
It’s also worth nothing that there are numerous brand name stocks with triple-digit (and even four-digit) share prices that are not having problems attracting buyers.
Tesla (TSLA) trades for more than $200 a share and the stock has continued to soar, gaining nearly 40% in 2014. Netflix (NFLX) and Amazon (AMZN) both have prices above $300 and are up substantially over the past 12 months. Shares of Chipotle (CMG) trade for more than $500. The stock is up more than 40% in the past year.
And then there’s Priceline (PCLN). The stock has a price above $1,200. You might think that the company should get Priceline Negotiator William Shatner to zap the price lower with a stock split. But why? The stock has soared 75% in the past year!
So Apple may be doing a smart thing to get its stock price to a more manageable level for average investors who don’t want to spend more for an Apple share than they do on an iPhone 5S or iPod Air.
But if Apple was still reporting strong revenue growth and wowing investors with innovative new gadgets, then nobody would care that the stock price was in the triple digits. The sad reality for Apple is that an iSplit is about as exciting as things can get for Wall Street as investors wait for the company to finally release a truly new product.
Reader Comment of the Week! It’s good to be back after a little “staycation.” I missed the opportunity to serve my daily dose of snark and see what readers volleyed back in return. (Anyone for tennis? Wouldn’t that be nice? First person to name the band behind that song lyric over on Twitter will get a shout-out in Tuesday’s column.)
Anyhoo, one of the things I did a fair amount of with Buzz, Jr. while I was out was watch some movies. He’s currently obsessed with “The Incredibles.” He also likes “Frozen.”
That inspired me to tweet that Disney (DIS) should do a mash-up for the two featuring Samuel L. Jackson’s ice king. I’m not the first to suggest this … as my Reader Comment of The Week hilariously points out.
Love it. Olaf! Where is my super suit?