Will Apple's Stock Split?

It never ceases to amaze me, but when I'm meeting someone new and the topic of what I do for a living comes up, there's one question I get more than any other: "So, will Apple (Nasdaq: AAPL  ) split?" To me, it's a largely insignificant question, and Tim Cook has signaled that there is "very little support" from the company's board to split the stock. Still, people are clearly interested in a stock split, so let's see what it means for investors and whether a split might make sense even if Apple's not considering one today.

Splitting 101
The basics of splitting is that companies might reduce their value per share but give shareholders a proportional level of extra shares. Simply put, a $100 company would now trade at $20, but you'd now own five shares for every one you used to own.

On a practical level, there has been no change in value. Proponents of splitting will point to the added "liquidity" of the stock. In other words, it's easier to make a purchase of a $100 stock than a $10,000 one. Behavioral studies have also shown that investors prefer stocks well below the $100-per-share range and that companies that split do outperform the market in the short timeframe after splitting and also over the long run. Finally, we come to options. A stock that's expensive on a per-share basis can be expensive to execute options strategies on. Apple at $600 per share means that an option represents $60,000 in stock.

Of liquidity
First, let's address the liquidity issue. Comparing Apple with many of its large-tech peers that trade at far lower share prices, Apple isn't affected by its higher share price.

Company

Average Shares Traded (3 Months)

Average Value Traded (3 Months)

Percent Market Cap Traded Per Day

Apple 18.4 million $11 billion 2.0%
Microsoft (Nasdaq: MSFT  ) 52.4 million $1.7 billion 0.6%
Cisco 41.6 million $850 million 0.8%
Google 2.7 million $1.7 billion 0.8%
Intel (Nasdaq: INTC  ) 41.7 million $1.2 billion 0.8%

Source: Yahoo! Finance. Average value traded is at today's prices. Percent market cap traded is at today's market cap.

A quick note: Since Apple's seen surging share prices the past few months -- and, to a lesser extent, other tech peers have seen their own jumps in this time as well -- this does inflate the average value traded per day. However, what the results do show is that even after accounting for Apple's 48% rise over the past three months, a significantly higher value of its shares trades every day. On March 14 alone, nearly $30 billion worth of Apple stock traded hands!

Looking beyond Apple, Google -- a company whose own shares trade for more than $600 per share -- sees volume on par with other tech peers; and priceline.com, which sits at $714 per share, sees 1.7% of its market cap traded each day.

The conclusion: Tech companies with higher share prices appear to have even more trading and liquidity than their low-priced peers do.

The next Berkshire?
A follow-up question I often get is "So, could Apple be the next Berkshire Hathaway (NYSE: BRK-A  ) and refuse to split shares even as they hit obscenely high levels?" As a bit of background on Berkshire Hathaway, Warren Buffett's investment vehicle: Its Class A shares have long been the priciest shares on the New York Stock Exchange. Today, they trade for $122,170 apiece. The company eventually created a "B" class of shares, but even those soared past $3,200 before a recent split was enacted to accommodate Buffett's purchase of Burlington Northern.

While Apple could definitely see its per-share price continue to rise, by $2,776 per share it'd pass the current value of the entire IT sector (including Apple itself). The following chart shows the milestones Apple would pass on its way to overtaking Berkshire Hathaway's share price. In short: not going to happen.

Source: S&P Capital IQ. Saudi Aramco estimated at $3.8 trillion. GDP figures are for 2010. Assuming no splits, adjustments for returns of capital, or dilution.

The best reason to split?
However, of all the reasons to split, the reason with the most tangible effect hasn't been included. Berkshire Hathaway, in spite of its mammoth market cap, was never included in indices such as the S&P 500 because of the difficulty rebalancing with its large share price. As Apple becomes larger and larger, a common question is "Who's left to buy its shares?" By paying out a dividend, Apple can now be purchased by yield-focused funds that control a sizeable amount of assets.

Another opportunity for Apple to increase its ownership is inclusion in more indexes. Notably, despite being the largest company in the world, Apple isn't in the Dow Jones Industrial Average (INDEX: ^DJI  ) . That's in large part because of the Dow's wonky price-weighting methodology. As Bespoke Investment Group noted last September, if included in the Dow without a split, Apple would constitute 22% of the Index. Since then, Apple has soared, only moving that percentage higher.

Bottom line
While it can be frustrating for individual investors that buying a single share of Apple means shelling out $600, that hasn't meaningfully affected the company's trading volume. In the end, it's big institutions that are buying large lots of Apple, and they aren't affected by its share price. At some point, I believe you could see Apple split its shares, but Tim Cook and company seem perfectly content to leave them unchanged throughout this year.

More ideas for the road
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Eric Bleeker owns shares of Cisco and Berkshire Hathaway. The Motley Fool owns shares of Google, Berkshire Hathaway, Intel, Cisco Systems, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, Apple, Berkshire Hathaway, Microsoft, priceline.com, and Intel; and creating bull call spread positions in Apple and Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (155)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2012, at 4:19 PM, applefan1 wrote:

    Do companies usually initiated stock buyback AND issue a stock split during the buyback period?

  • Report this Comment On March 25, 2012, at 4:31 PM, demodave wrote:

    "Percent Market Cap Traded Per Day"

    New to me, but an interesting metric for liquidity. Overall a good and interesting read.

    I don't care one way or another whether APPL splits, but I am very happy that they initiated a dividend and a stock buy back. They have chosen to do well by their investors (dividend) and their employees (buy back being used to balance dilution due to bonus compensation in the form of stock).

  • Report this Comment On March 26, 2012, at 5:58 PM, akfiredawg wrote:

    The only real beneficiaries for splits are the stock brokers. More shares + more trades= more fees. The real value of the stock does not change, it is merely a "mental" illusion.

  • Report this Comment On March 26, 2012, at 6:13 PM, tkell31 wrote:

    "In the end, it's big institutions that are buying large lots of Apple, and they aren't affected by its share price."

    Right. Wouldn't want to let the little retail guys get in there and buy some shares. Psychologically people would prefer to have 10 shares of a company at 60 than 1 share at 600, but Apple's been great to me so I shouldn't complain.

  • Report this Comment On March 26, 2012, at 6:34 PM, EquityBull wrote:

    Well based on "Behavioral studies have also shown that investors prefer stocks well below the $100-per-share range and that companies that split do outperform the market in the short timeframe after splitting and also over the long run" it is a no brainer for them to split, right?

    Why would apple not want a stock that investors prefer and that would outperform both short and long term post split? Apple management is actually looking not so smart for not splitting the stock here with these facts in hand.

    If you were running a company and a study was offered to you that said "If you split your stock you almost certainly would see higher share prices now and in the distant future then you would otherwise without splitting." Would you actually say "naaahhh....we prefer our share prices low, even though we don't do buybacks". Of course not. If apple had a significant share buyback (10B is a joke and only offsets options over 3 years) then I could argue to NOT split the stock in hopes the shares would be cheap and I could buy a ton more back. However this is not Apples modus operandi.

    Oh well...we have to wait and see when apple management gets a clue. In the meantime I hope they enjoy the stock trading at a 75 percent discount to their growth rate and being one of the cheapest stocks in the index....

  • Report this Comment On March 26, 2012, at 7:50 PM, TtheTA wrote:

    Personally, I think that all of the historical studies relating to the impact of stock splits are no longer valid. The reason: back in the old days prior to online access to brokerage accounts and instant trading, it was far more cost-effective to buy and sell lots of 100 shares rather than odd lots. Brokers didn't even want to deal with small odd lots. In today's world, it's simple and cheap to buy shares of a $600 stock one at a time if desired, and so it doesn't really matter if the stock sells for $6, $60 or $600 in terms of investor access.

    The only adverse impact of a high price (unless a stock approaches the Berkshire Hathaway model prior to creation of its class B stock where the ultra high price can prevent people from being able to buy shares) is the limitation on trading options. At $600, buying or selling a single option would create more risk than many investors should take on one stock. Even so, an ability to trade options doesn't really have any benefit to most investors (as opposed to stockholders who are really speculators). Therefore, I don't think that is something that the board of directors should include in their deliberations over a potential split.

  • Report this Comment On March 26, 2012, at 10:27 PM, baselineace wrote:

    The kind of people that refuse to buy high-priced stocks should probably not be investing in the stock market. More liquidity is often not a good thing either, as liquidity encourages speculation instead of investment.

  • Report this Comment On March 27, 2012, at 1:55 AM, jjfmclean wrote:

    @TtheTA - even with regard to options, it's easy enough today to get derivative exposure to a stock on a smaller scale than a single option contract (i.e. put or call over 100 shares) would allow. Spread betting is now a competitive enough market that their margins are pretty reasonable, and some allow you to trade as little as cents per point on shares, derivatives, currencies, indices. While I still hold my longer term positions (including APPL :-) ) directly, the flexibility my spread betting account allows me means it has become an increasingly important part of my portfolio, and now accounts for all my derivative trades and the vast majority of my short term plays on other markets.

  • Report this Comment On March 27, 2012, at 8:56 AM, johndog19 wrote:

    I think it's worth speculating whether AAPL and GOOG would have left their peers well behind in terms of trading volume if their valuations were more accessible. It's 2% for AAPL now; what would it have been?

    OTOH, does the volume measurement include derivatives trading? I think that's really the only thing that would change.

    @jjfmclean: Spread trades are one way to dilute the risk of option trades of these high-flying stocks, but they have a very different ROI profile than naked trades or synthetics, so they really aren't a straight-up substitute. Effectively, spreads dilute the returns, sometimes much more than they dilute the risk. I've had to bow out of trading a few high-fliers because of this.

  • Report this Comment On March 27, 2012, at 5:25 PM, mikecart1 wrote:

    The people complaining about AAPL to split shouldn't be investing in the first place. In fact, it would be better if AAPL did a reverse split and went over $1000/share so that only true investors that know what they are doing are buying the stock. Many people that are new seem to go to AAPL just because they own AAPL products but then complain that the stock is too expensive. They basically look at just the share price.

  • Report this Comment On March 27, 2012, at 10:16 PM, chibberd wrote:

    Don't over-think this. Let me see if I can summarize this quickly. Would you prefer to have a dollar bill or 10 dimes?

    If you ask a 5-year old, he will likely choose the 10 shiny dimes - they sparkle and there are 10 of them. An adult will probably go for the dollar bill - but who cares?

    Now let's talk about shares of Apple. Would you prefer a single $600 share or 10 $60 shares? It's the same thing! Again, who cares?

    Do you remember Nigel from Spinal Tap? His amp goes to 11. My guess is that he would choose to split the stock - probably 11 shares rather than 10:

    http://www.youtube.com/watch?v=EbVKWCpNFhY

  • Report this Comment On March 30, 2012, at 11:51 AM, WineHouse wrote:

    I agree that the "high share price" helps discourage speculation, including derivatives trading. This kind of speculation is potentially harmful to both long-term investors and the company itself. There's enough publicity about APPL right now to attract speculators, shorts, etc. without adding to the potential risk for serious folks by making it even easier for the troublemakers.

  • Report this Comment On March 30, 2012, at 11:57 AM, ipapajoker wrote:

    LOUSY ... BK has class B shares that are the equivalent of a split... to make them affordable

    save it for people that know nothing

  • Report this Comment On March 30, 2012, at 12:30 PM, Tsharp1947 wrote:

    I agree the split is a moot point and has no real effect on the stock's value. However, a split helps the little guy be able to get a "round lot." More important to me, it would allow me to buy enough Apple to be able to hedge significantly with the very lucrative covered call premiums now available.

  • Report this Comment On March 30, 2012, at 12:38 PM, raycart wrote:

    But what about when it comes time to sell? I am one of those great unwashed who "shouldn't be investing in the first place." As as a result, I got a chunk of APPL when its price was $18 (under $5 when accounting for splits).

    My issue: When I want to donate money to a charity via stock transfer or cash in a little bit for my own use, I have to do so in $600 increments (and perhaps soon $1,000 increments). That means a lot less flexibility on my part.

    Perhaps you would all say this proves your point: I would be tempted to sell instead of hold. But please remember that when I bought originally every professional was telling me to sell.

  • Report this Comment On March 30, 2012, at 12:46 PM, jrj90620 wrote:

    I believe all this infatuation with Warren Buffett is the reason we see so few companies splitting their stocks.Of course,most people look at the price and prefer to buy lower priced stocks over higher ones.That's a fact.Hopefully,when these companies finally figure out that Warren has shown signs of senility, recently,we will start seeing more stock splits,benefitting the holders of these stocks.

  • Report this Comment On March 30, 2012, at 2:48 PM, raycart wrote:

    @jrj90620 With Apple, it wasn't a fascination with Warren Buffett keeping them from splitting. It was a rivalry with Google. Once Google went so high and didn't split, Apple, which had split under Steve Jobs previously, stopped splitting.

  • Report this Comment On March 30, 2012, at 4:30 PM, remurraymd wrote:

    We have been long through several splits it has always been good for the stock we want a 10 for 1 like Bidu did on 5/10 we were long for a 200% post split run straight up after that. Like the recent return of the 1995 dividend Apple has split before and is overdue for one and a split would be good for us shareholders the CEO and the board work for.

  • Report this Comment On March 31, 2012, at 10:22 AM, upndn wrote:

    <b>Behavioral studies have also shown that investors prefer stocks well below the $100-per-share range and that companies that split do outperform the market in the short timeframe after splitting and also over the long run.</b>

    That says it all, so much for the 10 dimes or one dollar gang.

  • Report this Comment On April 02, 2012, at 12:25 AM, mike2153 wrote:

    So Apple might do a stock split because why? They don't have the money they need to buy their own country? They should set their sites on Australia. Own a continent. Think big!

  • Report this Comment On April 02, 2012, at 12:27 AM, mike2153 wrote:

    I know. I should have said "sights".

  • Report this Comment On April 02, 2012, at 6:57 PM, wolfmansbrother wrote:

    Excessive speculation can be very destructive to the markets as we all saw during the credit collapse. However, hardcore speculators are not going to be deterred by a $600 stock price, so I don't think that argument holds water.

    A split would probably only increase the share price over time as more small investors buy in, so there's really no downside.

    Getting back to the issue of speculation, the SEC can and should move to regulate automated high-frequency trading that is largely responsible for the unprecedented volatility we've been seeing recently. It's just a matter of time before we have another major crash.

  • Report this Comment On May 07, 2012, at 12:50 AM, TadpolesUS wrote:

    This article is BS. How many serious investors really care about the absolute share price? And why do you?

    At it's current price, anyone who wants to invest in Apple can - even if they only buy one share.

    You guys need to focus on more important stuff, IMO.

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