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.
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.
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.
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%|
|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.
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.
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