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.
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.
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.
This isn't a gimmick, it's Apple's next huge growth driver!
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.