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

Of all the great news Apple gave investors in its quarterly earnings, its 7-for-1 stock split is the least important. Here's why.

Apr 28, 2014 at 1:05PM


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.

This is important to Apple investors, it's the biggest thing to come out of Silicon Valley in years
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Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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