Apple, Inc's 7-for-1 Stock Split Is a Gimmick!

Apple  (NASDAQ: AAPL  ) has recently made a habit of updating shareholders on its capital return plans every spring. As a result, it wasn't surprising to learn on Wednesday that it plans to add another $30 billion to its ongoing share buyback program. However, the company shocked most observers by announcing a 7-for-1 stock split at the same time.

Stock splits have become increasingly uncommon recently. Apple hasn't split its stock since 2005, even though its stock price has soared more than tenfold in the interim. While the cost of splitting a stock is fairly small, it's not zero, and many investors believe that there's no advantage to having a lower quoted stock price.

Apple announced a 7-for-1 stock split this week.

Nevertheless, some investors prefer to own lower-priced stocks for whatever reason. Apple's stock split seems to be part of a strategy to appeal more to individual investors. It also may represent an attempt to move Apple into the widely followed Dow Jones Industrial Average in the future.

The official word
According to Apple's official FAQ, the stock split will take effect in June. As of June 9, shares will trade at the new split-adjusted price, which would be a little over $80 based on its stock price as of Thursday morning.

Apple has explained its decision to split the stock very simply: "We want Apple stock to be more accessible to a larger number of investors." Theoretically, there's no reason why a stock split should do this. It doesn't matter if you own five shares of Apple stock at $560 or 35 shares of Apple stock at $80 -- you still own the same (minuscule) percentage of the entire company.

However, many investors like to buy stocks in large round lots or just have a psychological aversion to any stock with a high price tag. If Apple wants to encourage more "average folks" to invest in its stock, it's better off catering to their psychological biases than trying to fight them.

That's not all
Apple's stock split will also make the company a strong candidate for the popular Dow Jones Industrial Average, if and when it decides to drop one of its current components. The Dow is a price-weighted index, which means that high-priced stocks have a bigger impact on the index. A $500+ stock would unduly influence the index price, so it wouldn't be considered for inclusion. By contrast, Apple would fit right into the pack with an approximately $80 stock price.

Joining the Dow doesn't have many tangible benefits, as index-tracking funds are more likely to follow the broader S&P 500. However, inclusion in the Dow would be another signal to conservative/risk-averse investors that Apple isn't a risky tech growth company anymore.

Apple has also set a policy of annual dividend increases to attract income investors

An even bigger sign that Apple is courting more conservative investors is its new dividend policy. As part of its capital return update, Apple increased its dividend by 8% and announced that it plans annual dividend increases going forward. This step is designed to make Apple more appealing to "income" investors.

Foolish bottom line
For many long-term investors, Apple's upcoming stock split will seem like a gimmick. In some ways, it is a gimmick! However, as an Apple shareholder, I don't really care because it's a gimmick that is likely to work. Some investors simply won't consider "high-priced" stocks, and since growth investors have clearly tired of Apple stock, widening the potential investor base can only help.

Apple's potential inclusion in the Dow Jones index at some point in the future could further boost its Main Street appeal. Furthermore, its new official policy of annual dividend increases will make income investors happy.

In the long run, Apple's earnings power will determine how well the stock performs. Based on the company's big earnings beat on Wednesday, things look good on this front. However, by making the stock itself more investor-friendly, Apple is providing some instant gratification. Most shareholders will appreciate that, too.

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Read/Post Comments (44) | Recommend This Article (41)

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 April 24, 2014, at 12:03 PM, TMFAeassa wrote:

    Great article!

  • Report this Comment On April 24, 2014, at 12:08 PM, brajaharidas wrote:

    Dear Author,

    The title of your article, "Apple, Inc's 7-for-1 Stock Split Is a Gimmick!" makes it seem like your article will be a negative one for APPL; but after reading it (since I read ALL articles on Apple, positive and negative) it feels like it is a positive one for APPL. Hope you are an apple supporter.

  • Report this Comment On April 24, 2014, at 12:19 PM, garysund wrote:

    Apple was very smart by doing this stock split at the same time it delivered a excellent earnings report. It created a badly needed stir of excitment to jump start the stalled stock. Apple stock has been so under valued. Smaller investors shy away from what they consider to be higher priced stocks. As a investor we all know it is all about percentage not price but the novice investor does not think this way. Apple is just beginning it's climb to new highs.

  • Report this Comment On April 24, 2014, at 12:34 PM, ChipDipson wrote:

    It's about time. People do not understand the arbitrary nature of share prices. I had to endure dozens of articles over the past few years written by people who point out that the stock was expensive because it hit $700 (nevermind single digit ex-cash P/E). If they split 3 years ago no one would have gone out of their way to point out the stock was expensive when it hit $100 in Sept 2012.

  • Report this Comment On April 24, 2014, at 12:41 PM, GaryDMN wrote:

    Apple's split changes nothing, it doesn't help or hurt investors. As you mention, it does open the door for small investors to buy stock and get more shares for the same investment dollars. There was very little criticism of Google's stock split, which was a gimmick to get more control of the voting stock. Insiders can and are rotating out of the non-voting GOOG shares and buying voting GOOGL shares, hence the price difference that exists today. This gives them more control of the company. It also forces the company to pay the difference in price between the share prices, which is a cost that applied to all Google shares. That's a gimmick, Apple's split in neutral to control and every aspect that would affect shareholders, insiders or the company.

  • Report this Comment On April 24, 2014, at 12:47 PM, PsiKick wrote:

    Gimmick? Yeah, it's a gimmick. A gimmick that addresses the fact that there are millions of very happy Apple product owners who don't own Apple stock. A gimmick that addresses the fact that Joe Average would buy 5 shares of Apple at $100 when he wouldn't buy one at $500. A gimmick that seems to address Apple's belief that Apple can get to $100 a share hence a 7:1 split that brings it down to around $80 at today's price. But that's just my uninformed logic train.

  • Report this Comment On April 24, 2014, at 1:06 PM, Tgar13 wrote:

    Actually data shows companies that split do 9 percent better than companies that don't in the

    Following year

  • Report this Comment On April 24, 2014, at 1:12 PM, buckeyefanboy wrote:

    Buying a $500 stock isn't possible for some individual investors. If you're contributing say $400 a month to an IRA (a pretty standard amount if you're looking to max out IRA contributions) and you're making stock purchases every month, you're literally priced out of a $500 stock.

  • Report this Comment On April 24, 2014, at 1:14 PM, Uberxy wrote:

    AOLs seven stock splits made me a millionaire. I like Apple. I like gimmicks

  • Report this Comment On April 24, 2014, at 5:41 PM, RussellL wrote:

    First Apple was doing buybacks (taking away available shares from the market) and now they're doing a 180 and are multiplying shares.

  • Report this Comment On April 24, 2014, at 5:48 PM, RussellL wrote:

    "Actually data shows companies that split do 9 percent better than companies that don't in the following year."

    So people should sell AAPL in the following year because beyond that a company's stock does worse?

    How many years before Apple does the next gimmick, a reverse split?

  • Report this Comment On April 24, 2014, at 9:12 PM, TOM48 wrote:

    There are also mutual funds that are not allowed to buy stocks priced over $100. Now they will be able to do so. This opens up more funds to Apple. They will have to buy & this will in turn drive demand for the stock causing the stock price to rise.

  • Report this Comment On April 24, 2014, at 9:25 PM, kxprice wrote:

    What Apple is doing is simply making its stock more accessible. At $500+/share, it was too "rich" for the average investor to purchase at the 100 share normal purchase. At $80/share, it will find many new investors. I'm certain the price will rapidly increase to over $100/share once new investors get in.

  • Report this Comment On April 24, 2014, at 9:49 PM, PeggiLi8 wrote:

    If ten one dollar bills in your wallet makes you feel better than having one ten dollar bill, then you are going to like the Apple split.

    Some individuals cannot get there hands on the $10 bill (like me), but they can accumulate five $1 bills. Same rationale with the split. Some individuals can buy five shares at $75, but cannot afford one share at $525...I mean $565.

    I’m poor. I’m still using my iPhone 4 cause I can’t justify/afford buying a new one. I live off rice/beans/ramen. I drive an old beater. I roll into the gas station on fumes. I have the absolute cheapest, bare minimum crappiest insurance policy I could find ($23/month from 4AutoInsuranceQuote.. woohoo!)… and that’s only cause it’s required by law! In fact, my friends always give me their second hand, unwanted stuff cause they know I’d take it and use it!

    Am I happy that I can finally afford to buy some Apple stock? Not really, but at least I can afford to buy some now if I ever wanted to!

  • Report this Comment On April 25, 2014, at 1:00 AM, PaulMaggie99 wrote:

    Adam, you are long calls, correct!

    You are wrong in calling the split a gimmick. any shareholder with more than 15 shares will now have over a hundred shares - so the now can, for example, sell covered out of the money calls to reduce risks and generate additional income!!

  • Report this Comment On April 25, 2014, at 3:21 AM, ddesluca wrote:

    A negative title and then a bunch of reasons why the stock split is a positive thing for Apple AND investors.

    C- for journalism.

  • Report this Comment On April 25, 2014, at 6:23 AM, baligeko2 wrote:

    Shame it was not 10:1

    Perhaps a prime number like 7 has more "magic".

  • Report this Comment On April 25, 2014, at 6:23 AM, baligeko2 wrote:

    Shame it was not 10:1

    Perhaps a prime number like 7 has more "magic".

  • Report this Comment On April 25, 2014, at 6:23 AM, baligeko2 wrote:

    Shame it was not 10:1

    Perhaps a prime number like 7 has more "magic".

  • Report this Comment On April 25, 2014, at 10:45 AM, Fedman wrote:

    The Motley Fool shamelessly pumps Apple and they disclose that it is held in two of their portfolios. I couldn't believe by the title that they were going to publish a negative Apple article, and, not surprisingly, they haven't.

    I am long Apple, so I don't care. I do agree that many investors stay away from high dollar stocks, but the impact on the performance it has is hard to discern.

  • Report this Comment On April 25, 2014, at 12:58 PM, mikecart1 wrote:

    I am long Apple and not a fan of this stock split. It seems more of a decision by Tim Cook to satisfy complainers. But it could turn out good in the end, maybe? It would be nice to see the stock move past $100/share post-split.

  • Report this Comment On April 25, 2014, at 1:14 PM, quiltedwolf wrote:

    seems to me that the big plus for a shareholder is the dividend ??

    if you had on share of aapl and got a 3.06 div and then you have 7 shares of aapl you get 7 times 3.06. correct

    sounds better to me

    God Bless America

    QW

  • Report this Comment On April 25, 2014, at 1:26 PM, Mathman6577 wrote:

    I agree. The split is a gimmick and probably won't move the neddle. More important is the dividend increase and share buybacks which will return cash to investors. And the elephant in the room is a new product category later this year (most likely iWatch) and a bigger iPhone screen. Icing on the cake will be a mobile payments platform and enhanced Apple TV. Over the long term AAPL is a good stock to hold for both value and potential growth.

  • Report this Comment On April 25, 2014, at 1:49 PM, Fedman wrote:

    quiltedwolf

    Sorry. The dividend will be divided evenly among the split shares. That's why it's $3.29. $3.29/7 = $0.47 per share after split.

  • Report this Comment On April 25, 2014, at 2:38 PM, cstevens21 wrote:

    This is simple. It's a good thing. You can't by 1/7th of a stock. If they do a 7 for 1 split, they'll make it so more investors can own the stock. At $80 a share, an investor can by, for example, 2 shares of AAPL. Without the split, if someone wanted even 1 share of AAPL, they couldn't afford it. Why is this such a difficult concept to grasp for people? Not everyone has 10s of thousands or even thousands of $ to invest into one stock, even if it is AAPL.

  • Report this Comment On April 25, 2014, at 4:02 PM, mobiusstrip wrote:

    It took getting all the way down to the final comment to finally seeing some common sense. Many individual investors don't trade in the tens of thousands of dollars. We don't care about buying/selling 100 shares versus 85 shares; we care about being able to sell 1 share versus 3/10 of a share -- which is impossible.

    If I hold 1500 worth of apple stock and want to sell half of it: I cannot. I can only sell one-third or two-thirds of my position. If the stock splits from $500 to $70, I can now sell almost exactly half of my position if I choose to do so.

    This isn't rocket science.

  • Report this Comment On April 25, 2014, at 4:32 PM, BUbulldog wrote:

    Motley Fool trolling again with the title of this article...

    If I have $500 to invest and I want to buy AAPL, what do I do?

  • Report this Comment On April 25, 2014, at 4:35 PM, thrilled747 wrote:

    Believe what you want Apple is A good company.In countries in Asia if you have an iphone it's A status symbol.When it splits I will most likely buy more shares.

  • Report this Comment On April 25, 2014, at 4:52 PM, jhzpub wrote:

    I find it strange the DJIA fas so many banks, retail and insurance companies instead of the industrials the index is supposed to measure. AAPL would be a good addition in lieu of one of the aforementioned.

  • Report this Comment On April 25, 2014, at 5:41 PM, cmrk3 wrote:

    It is not a gimmick. It will put Apple in the Dow Jones Industrial Average. Apple belongs there. It will replace Microsoft.

  • Report this Comment On April 25, 2014, at 7:41 PM, somethingnew wrote:

    It does seem like a gimmick but whatever Apple's motivations (good or bad) I'm glad their doing this so that some people who want to invest in Apple but previously couldn't can afford it now. $500 may not sound like a lot but to some it's near a half month's pay so far some this is perfect.

  • Report this Comment On April 25, 2014, at 8:20 PM, Norand81 wrote:

    Not to own Apple is like telling Carl Icahn to put his wallet on a plane leaving Malaysia.

  • Report this Comment On April 25, 2014, at 8:26 PM, TMFGemHunter wrote:

    Thanks for the comments everybody.

    I'm sure that there are some people who want to buy/sell less than $500 of Apple stock at a time. But this is a tiny proportion of investors. And it's not something that I would recommend. Trading in tiny increments just makes brokers rich because the commissions eat up a significant portion of your capital.

    Adam

  • Report this Comment On April 25, 2014, at 9:02 PM, ellaerdos wrote:

    Good Article Adam!

    But its not a gimmick, its marketing and everything else Apple does is marketing, so why not stock?

    I'm long on Apple and this will allow me to be longer.

    .7)

  • Report this Comment On April 25, 2014, at 10:01 PM, malclave wrote:

    When I was just starting my portfolio, there would often be times where I would put in $1000. At $560 a share, I could buy 1 share of Apple, and $440 worth of another stock (paying a second fee), or leave the $440 in cash for the next time I put in money to buy stock (which in my mind would make me question why I put in $1000). Or I could buy $1000 of another stock... which is what I tended to do.

    At $80 a share, I could buy 12 shares of Apple if that's the stock I wanted.

  • Report this Comment On April 25, 2014, at 10:12 PM, mtr wrote:

    You just made Fidelty, Schwab, Etrade etc. money by charging their customers that hold Apple stock a mandatory reorganization fee of $39 or worse just because they own Apple stock as of the record date.

  • Report this Comment On April 25, 2014, at 10:43 PM, danialwilson wrote:

    I ain't apple supporter since 2 years, it is a quite lengthy store will tell you another time. I have question after reading this article I couldn't understand the policy of apple for it's stock holders? How it's stock is beneficiary for investors? I am still confused to understand the policy.

  • Report this Comment On April 26, 2014, at 10:26 AM, bordereiver wrote:

    Those of us who are active in investing, and have enough money to buy a stock that goes for 500+ dollars, it means nothing to us.

    Perhaps there are some younger folks without a big stock portfolio, but they would like to buy some Apple stock, maybe some will buy at 80 but not 500 or more. Maybe so, maybe not but I don't see that it hurts me in my investing in Apple.

  • Report this Comment On April 26, 2014, at 11:30 AM, kayletkgb wrote:

    In the Bible, 7 is the number of completion. Even if the dividend splits, the more shares you have, the more dividend. It gives folks ability to buy at a lower price.

  • Report this Comment On April 26, 2014, at 4:16 PM, agc7811 wrote:

    So say I have $10,000. to invest. 10,000 / 560 = 17.86; But 10,000 / 80 = 125. So if the Stock jumps up $1.00, at the higher price I gain 17.86 dollars. At the lower price I gain 125 dollars. This is more about the amount of people who can buy at the higher price being far less than the people who can buy the stock at a lower price.

    I know that if I only have $10,000. Apple isn't the stock I should be looking into, but this sample was a basic and simple one.

    Another theory goes: Apple Executive have blank many shares and a 7:1 split helps them gain more shares of stock, so when the price rises they can gain more value as well. Imagine 7 x the amount of shares they now have. That's a number I can't count on two hands and a foot.

  • Report this Comment On April 26, 2014, at 6:17 PM, sillygoose wrote:

    I am happy Apple is splitting 7 for 1. I am an investors that cannot see myself buying a single share of stock for $500, no matter what the company is. I know that it doesn't change the value, but prices that high, are out of reach for me to acquire any meaningful number of shares to make it worth it. With the 7 for 1 split and the high dividend payout, Apple's Stock is looking like a better income investment for investors like me.

  • Report this Comment On April 26, 2014, at 7:04 PM, Lucaskasan wrote:

    "But this is a tiny proportion of investors." How do you know? People with lots of money tend to think the littlest guys are a tiny proportion. Millions of people max out their IRA contributions each year at $5,500. Often this is the only investing they do.

    1 share at $500 is as tiny an increment as 20 shares of, say, GE, or 250 shares of CROX in 2009 when I bought after it had been approved as a diabetic shoe.

  • Report this Comment On April 27, 2014, at 6:58 AM, BetaPilot wrote:

    Why didn't they just do a ten-for-one split? What is the significance of seven?

  • Report this Comment On April 29, 2014, at 10:07 AM, johnnygibber wrote:

    For me its all about divi reinvesment.

    I managed to get 10 stocks @ around $500 - so not a big investor.

    At current SP takes me around 4-5 yrs to gain 1 extra stock. 5 years sitting on a divi hoping SP doesn't rocket ?? hmmmmm...

    With new 70 stocks I will at least move the needle with 1-2 stock added per year..

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