Why an Apple Stock Split Would Really Matter

Shares of Apple (AAPL 0.51%) were lagging the broader market throughout the day, in part due to reports that the company was substantially reducing iPad panel display orders. All of a sudden, shares abruptly jumped on heavy volume from being down a couple dollars to gains of nearly 2%.

What caused the spike?

An Apple bear
Doug Kass of Seabreeze Partners has long been a very vocal (and usually incorrect) Apple bear. The investor has made the rounds on numerous occasions to outline his short thesis, and only recently been proven right amid Apple's pullback in recent months.

According to Kass' Twitter account, he is putting out a rumor that Apple is preparing to propose a stock split at the company's annual meeting tomorrow, which promptly sent shares skyward. Interestingly enough, this comes shortly after Kass has turned bullish on Apple in the near term and initiated a long position. He even noted yesterday that he "aggressively added" to his position under $443. Keep in mind though that Kass has said before that he only trades Apple for the short-term moves, and would never consider himself a long-term investor in the iPhone maker.

As trading progressed, Kass began to sell off part of his position, and then after further paring, he discredited the very rumor he started. He added that Apple only has authorization for a 2-for-1 split and any higher ratio would require shareholder approval. He also attempted to make it sound like he wasn't the source of the rumor, saying it's been "all over the Street."

Go long. Spread rumors. Sell position. Discredit rumors. Classy move, Kass.

Kass has also been known to start dubious rumors on Twitter before, like when he tweeted late last year that Donald Trump had procured divorce papers between President Barack Obama and Michelle Obama. He even used the exact same phrasing about a "Gnome."

Still, dramatic tweeting aside, Apple could still theoretically propose a split of some sort tomorrow. Would it matter?

A stock split doesn't matter until it does
Investors already know that stock splits have no meaningful impact on a company's fundamentals. All the math works out the same and the move does not improve earnings potential or the underlying business in any way, shape, or form.

Apple has had three stocks splits in its history.

Source: Apple.

That being said, investors love stock splits. A lot of that adoration is purely psychological, as there is a positive correlation and association between companies with strong businesses splitting their stock. It's kind of like dividend signaling theory where investors consider it a vote of confidence from management.

However, in the case of Apple, there are several reasons why a stock split actually can be considered a legitimately positive catalyst for Apple.

Why it would matter
Apple has reached a point in its story where it can no longer be reasonably expected to put up the kind of blistering growth that it has over the past five years. At $165 billion in trailing-12-month sales, the company has quickly and painfully run into the law of large numbers. The company continues to be a consistent and reliable cash machine. Those two facts combined mean that Apple's investor base will be transitioning to value seekers. Bringing in value investors and broadening the investor base is critical to stop shares from further declining as growth seekers head for the exits.

Doing a stock split can potentially broaden Apple's investor base. Many individual investors run into psychological constraints when it comes to high share prices, particularly old-fashioned investors that like to buy stocks in round lots of 100 shares. Individual investors play a small role in Apple's overall movement and institutions still ultimately call the shots, but artificially reducing the share price makes the stock more approachable in the perception of the individual investor.

More importantly, Apple's hefty share price has been the single most important reason why Apple has never been a component in the Dow Jones Industrial Average. The antiquated index is price weighted, so Apple's presence would disproportionately dominate the Dow's daily moves if it were included. Even at the depressed levels of $450, the next highest stock in the Dow would be IBM at around $200 -- meaning that the currently largest component would have less than half the weighting of Apple if it were added now.

If the rumors prove true and Apple splits, it could see its individual share price go down to $225 (2-for-1) or $150 (3-for-1), depending on what kind of split ratio is used. Theoretically, if Apple split 3-for-1, it could be an attractive candidate for Dow inclusion. You could argue that Apple belongs in the Dow, since it's the bluest of the blue chips. If that happened, all of the Dow index funds out there would be required to buy Apple and that buying pressure would further support shares.

Just last year, Apple reinitiated its dividend after a 17-year dry spell. Investors have CEO Tim Cook to thank for that move. On the dividend conference call at the time, Cook said this about a possible stock split:

[A stock split] is something that we have looked at while we were looking at this cash question, and the current information we have would suggest that there's very little support that it helps the stock. However, we are in a unique position and at a unique point in time, and so this is something that we continue to look at. And if we reached a decision that we thought it was in the best interest of Apple and its shareholders, we would do it. But again, at this point, that's not how we see it.

Cook's comments made it clear that a split wasn't happening at the time but it would definitely remain on the table if management thought it would benefit shareholders. Perhaps Apple is now warming up to the idea and investors may also be able to credit Cook with the first split in eight years.