Here's Why You Shouldn't Get Overly Excited About Apple Inc's Stock Split

Source: Wikimedia Commons.

One tidbit that got a lot of attention from Apple's  (NASDAQ: AAPL  )  earnings report was its planned stock split. Apple had a monster quarter, in which it beat expectations on iPhone sales and generated solid revenue and profit growth. In addition, Apple announced it would buy back more shares and increased its dividend. These catalysts, which are true creators of shareholder wealth, were overshadowed in the financial media by Apple's stock split.

It's important not to get carried away when a company splits it stock. That's because stock splits do not create value for shareholders. Although a stock split makes for an attention-grabbing headline, there are far better reasons to get excited about Apple's earnings report.

Stock splits are not a value creator
Apple's planned 7-for-1 split may look enticing, but it doesn't create value. Essentially, a company that splits its stock is just creating more pieces of paper, which hold the same cumulative value. In other words, if you held a $10 bill and exchanged it for 10 separate $1 bills, you'd have more pieces of paper, but the same amount of money.

In Apple's case, the split may make some sense. At current prices, some retail investors (who allocate a relatively small amount of money every month) are effectively priced out of an Apple share. In addition, there seems to be a psychological impediment that exists, some are reluctant to purchase a share of a stock trading in the $550 range. Moreover, Apple is now eligible for inclusion into the Dow Jones Industrial Average, which may prompt certain index funds that track the Dow to buy Apple.

Bigger fish to fry
Still, when it comes to Apple, there are far more compelling reasons to buy the stock than the split. For one, growth is back in a meaningful way. Apple produced 4.5% revenue growth year over year and double-digit earnings growth in the most recent quarter on the back of strong iPhone sales.

In my opinion, this goes a long way to show the true strength and staying power of the Apple brand. Apple is perhaps months away from releasing the iPhone 6, which you'd normally assume would keep consumers from buying the iPhone 5. And yet, Apple still sold nearly 44 million iPhones last quarter.

Apple generated $45.6 billion in sales and more than $10 billion in profit in the most recent quarter, despite this essentially being a muddle-through period before an updated product hits the market. The fact that Apple posted such huge profits, without the benefit of new products, is truly amazing.

The things that really matter
The bottom line is that of all the reasons to love Apple's earnings release, the stock split shouldn't top your list. The more important areas are Apple's product pipeline, its dividend, and its commitment to buying back shares. Those should be more exciting than the stock breaking into smaller pieces.

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Comments from our Foolish Readers

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  • Report this Comment On April 28, 2014, at 1:30 PM, TLW wrote:

    Although I get the math that the valuation of each share has not changed, there is value created in that there are now more shares priced at reduced cost, which makes it more attractive to buyers. After all, the value of the stock sold at the stock market is what someone is willing to pay for it. In 40 years of investing, whenever a stock has split, the price generally rises as buyers drive the price forward. Couple that with increased sales, revenue, profit, increased dividend yield and new products coming on the horizon, and you have a locomotive for price growth. "All aboard...!"

  • Report this Comment On April 28, 2014, at 1:34 PM, oatmeal33 wrote:

    No one is talking about the psychological effect of the split. Imagine if there was no split to come, and AAPL started getting up toward $700 again in the next few months. Traders would get nervous and start pulling out of the stock. They'd get a certain "deja vu" feeling, and think that AAPL was in nosebleed territory again, and that it could be about to fall off the cliff. Now that $100 will be the new $700, that effect should go away to some degree. Shut up about how the math and the valuation are the same. Who cares? That doesn't mean psychological effects don't exist. Lots of traders and investors won't get nearly as anxious to see AAPL hit $100, compared to how they might feel if it hit $700.

    Think about it -- do you think it's a coincidence that AAPL peaked just after it passed a nice round number like $700? People didn't pull out of the stock en masse when it hit $670, or $680 or $690...but when it passed $700. There has to be a psychological effect at work there..

  • Report this Comment On April 28, 2014, at 2:29 PM, duuude1 wrote:

    Duuudes, the author is talking about value - you are both talking about price... big difference.

  • Report this Comment On April 28, 2014, at 3:18 PM, nealdoughty wrote:

    I've seen several articles like these. Are there really people who don't understand the math? Could anyone believe that the value of their investment just got seven times larger? Even USA Today ran such an article.

    BTW: Another advantage: This will put AAPL shares at a price that could put them on the DOW, as in real humans making the market instead of easily manipulated machines.

  • Report this Comment On April 28, 2014, at 3:33 PM, commercenary wrote:

    I think both issues mentioned in the first two comments were addressed by the author in the body of the article.

  • Report this Comment On April 28, 2014, at 7:50 PM, ballen wrote:

    I think the split combined with the coming new products and strong sales during a normally slow period will result in strong stock performance. In addition the increase in dividend will be an extra kicker for the stock this year.

  • Report this Comment On April 29, 2014, at 4:44 AM, CraigWPowell wrote:

    Apple Stock Positive Forecast published by I Know First algorithmic system 2 weeks ago:

    AAPL is up +15% in last 2 weeks.

  • Report this Comment On April 29, 2014, at 4:58 AM, Wingsy wrote:

    I know of 2 people, a brother-in-law and a friend, that said Apple was "too expensive" when I suggested a year or two ago that they buy into AAPL. It remains to be seen if they actually get into it after June, but that's two out of two for my experience where the high stock price had scared them off.

  • Report this Comment On April 29, 2014, at 5:36 AM, Tuxster12345 wrote:

    @TLW No, the "value" of a stock is NOT the price someone is willing to pay for it. Whatever someone is willing to pay for a stock is the stock's PRICE - not its value.

    As Buffet once said about common stock, price is what you pay - VALUE is what you get.

    If a stock that currently sells for $5 a share is subject to a 3:1 REVERSE stock split, is the "value" of the stock now $15 a share?

    Not necessarily.

    To find a stock's value, you need to dig into a company's financials and make some discounted cash flow calculations.

  • Report this Comment On April 29, 2014, at 5:40 AM, Tuxster12345 wrote:

    @duuude1 Trying to explain to some people the difference between price and value can be like talking to a brick wall.

  • Report this Comment On April 29, 2014, at 5:44 AM, Tuxster12345 wrote:

    @Wings Did you buy AAPL above or below its intrinsic value? And, did you include a decent margin of safety in your calculation?

  • Report this Comment On April 29, 2014, at 7:54 AM, geraldkeith wrote:

    The stock split will attract more investors including those who have limited portfolios and sell options, where the greatest value gain will be realized.

  • Report this Comment On April 29, 2014, at 6:40 PM, Bravadu wrote:

    A lot of people don't see anything other than the share price. I know a guy who's had only 1 share of Apple for more than a few years by now.

    Stock split is basically a cheap (free actually) gimmick, but you cannot argue that it doesn't help the stock's performance if it's in the hundreds pre-split.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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