What Investors Need to Know About Apple Inc's Upcoming Stock Split

On June 9, Apple (NASDAQ: AAPL  ) shares will begin trading on the Nasdaq at a split price of 7-to-1. While the traders and speculators share their predictions on the effect the split will have on the direction of the stock, here's a simpler look at the split for long-term investors who simply don't care about day-to-day and month-to-month speculation.

The mechanics
There are several key dates investors need to understand regarding Apple's upcoming stock split:

  • Monday, June 2: This is the record date, or the date that determines which investors will receive additional shares due to the split.
  • Friday, June 6: This is the split date. Shareholders who purchased shares before the record date will receive their split shares after market close on this day.
  • Monday, June 9: This is the ex date, or the day shares will begin trading at the new split-adjusted price on the Nasdaq.

For those unfamiliar with stock splits, this probably prompts a question: What happens to investors who buy shares on or after the record date and before the ex date? These investors' shares will still split following the stock split once your brokerage account is credited with the additional shares resulting from the split, just not immediately on the split date. In other words, the split will simply take a little longer.

The split is simple. For every one share investors own, they will now have seven. Each of these shares will be equal to one-seventh of the pre-split share price. For instance, if the pre-split Apple share price is $635, post-split shares will initially trade at $90.7.

A useful side note: the seven-for-one split gives Apple investors an excellent reference point. Since Apple stock's all-time high was a few dollars above $700, investors should keep in mind that basically anything above $100 would mark new highs for the stock.

Intrinsic value
Will the split have any effect on the intrinsic value of the underlying business? Not at all. Asserting a share split will boost the value of a company is like saying there is more calories in a pizza once it's sliced.

What will the intrinsic value of Apple's underlying business be on a per-share basis? With very conservative assumptions, I estimated Apple's pre-split intrinsic value to be $750 per share. Post-split, that's $107. In other words, I'd think twice before buying Apple shares at a post-split price above $107. While my estimate of Apple's intrinsic value is not meant to pinpoint the exact point at which the company is fairly valued, it at least offers a ballpark reference point. It's worth repeating, though, that the valuation was based on conservative assumptions.

When it's all said and done, the split will ultimately create absolutely no need for any action among investors. Sure, some traders will undoubtedly choose to take some sort of trading action in speculation of short-term swings as a result of the split. But the return long-term investors will see over the next several years will, by no means, be affected by this split.

The only action investors may want to take is to come up with a post-split figure for Apple stock that reflects their per-share intrinsic value estimate so they have some sort of reference point -- and that's it.

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  • Report this Comment On June 01, 2014, at 11:11 AM, applefan1 wrote:

    There are a few things that seem not covered well by these Apple stock stories I'm reading.

    1. The money that is made and stored in Ireland is actually worth about 30% less if they were to bring that money into the US to pay for the increasing debt Apple is incurring when they bought stock and paid dividends. Are people taking into account the lessor value of that money?

    The other thing to consider is that Apple, as of last year, isn't on a high growth rate for gross revenues, net profits and consistent profit margin.

    What is going to be this year's growth rate, etc.? What is next year's growth rate? How long can they continue this? Obviously is Apple going to have to constantly buy back more shares and then continually issue more stock to keep attracting new buyers of shares?

    What people are forgetting is that Apple isn't at a 30, 40, or 50% growth rate anymore, they are lucky if they can squeeze out a 20% growth rate year to year on a quarterly basis.

    If you look at each of their revenue streams, some are flattening, some are going down and others not growing as fast as they once did.

    There are 4 things that Apple has to continually do. Here's my list.

    1. Create/refresh products to create demand.

    2. Create demand by opening new markets in new countries by opening up more Apple Stores. And the demand they create has to be across the board as much as possible instead of just in certain product lines.

    3. Increase production. It's not just building more assembly plants, but the components they buy have to be produced by all of their component suppliers as well. If a product doesn't meet demand in a timely manner, they risk losing a sale. The MacPro took about 7+ months to decrease the 4 to 5 week waiting period to less than 2 weeks to get a product from when you ordered it. That's a long time to catch up. It shouldn't take that long. They need to cut that time down to only about a month or two to prevent lost sales from those that simply can't wait.

    4. Continually coming up with new revenue streams. the iPod product line has been going away and they haven't refreshed the line, so either they need to refresh the line to increase demand/sales of iPods, or is that revenue stream simply going down to very low levels and what are they going to do to replace that decrease in revenue/profits and to INCREASE to add additional revenue/profits while keeping a decent profit margin.

    Obviously the new iWatch/wearables is an interesting new revenue stream, but in all sincerity, how much revenue/profits and profit margin is it REALLY going to add and is it enough to replace what the iPod was doing and should be doing?

    Is this home automation really going to bring in a lot of revenue for Apple, or is it just the functionality to add third party products like Nest, Hue, etc.? Apple doesn't make these 3rd party home automation, companies like Philips, Nest, Belkin and others make them, so i just see home automation more of a 3rd party opportunity and just a simple free feature to help sell more iPhones, iPads, etc.

    Apple doesn't have the OS X, iWork, iLife revenue streams anymore since they started giving away that revenue out, so what's going to replace that lost revenue stream.

    FYI, I'm a huge Apple fan and love their products. I'm just not seeing the big growth rates with the company to support these fast run ups int he share value and I don't think Apple is going to continually be buying back large blocks of shares AND splitting the stock continually, nor do I see Apple growing at anymore that 15% year to year, which means they are just growing minimally and it's more of a hype than substance. I still don't know how long it's going to take for Beats Music to bring in 5% to 10% Net Profit.

  • Report this Comment On June 01, 2014, at 11:14 AM, daveshouston wrote:

    The author said: "But the return long-term investors will see over the next several years will, by no means, be affected by this split."

    I disagree. Small investors have tended to balk at paying $600 plus for a single share of stock. Investors are used to trading in 100 share lots. At todays price, 100 shares of Apple would require a $63,300 investment. After the split, that same small investor would be able to by 100 shares for $9,042, a much more reasonable number.

    Apple has many customers who are rabidly enthusiastic about the company's products. They believe so strongly that Apple's products are best in class that they are predisposed toward investing in Apple, if only they could afford it. The stock split brings that 100 shares in reach. Oh sure, they could have just bought 14 shares before the split, but that's not how they've been taught to invest.

    Another factor is that these same small investors may think that Apple's stock is more likely run up from $90 to $120, 33% gain, than it is to run from $633 to $842, a similar percentage gain.

    There is a great deal of psychology in stock market investing. It isn't all about charts, ratios, and numerical analyses.

  • Report this Comment On June 01, 2014, at 12:43 PM, jdc47 wrote:

    So if I'm following the mechanics correctly, investors who buy shares after June 2nd but before June 9th will pay the pre-split price but since they wouldn't have owned the shares by the June 2nd record date they will not receive any split shares June 9th.... or will trading of Apple shares be halted for a week?

  • Report this Comment On June 01, 2014, at 12:50 PM, skippywonder wrote:

    @Applefan1

    Apple took on debt specifically to avoid the problem of the tax bill it would have if it repatriated funds. They don't need to bring that money to the US to pay the debt. They make the payments from domestic cash. As such, they use the foreign cash as collateral and make domestic payments, thereby leveraging the power of that money without the tax hit. And they write off the interest while saving money on the dividend they would have paid on each share bought back. There is no reason to worry about the cost of bringing overseas cash back to "pay off the debt". The debt exists because of the overseas cash, not in spite of it.

    Some of the other issues you list for Apple are a little confusing as well. They seem to be under pressure to make new gadgets but also to make more of them. If one of your challenges is keeping up with demand for your product, is the concern about future demand for the product really that dire?

    Lastly, you are underestimating the market for wearables. They will replace the lost iPod sales and more. Moving into mobile payments will also create a hundred billion dollar opportunity. The tablet market is still in its early days as well. Apple has a lot of runway left on existing products and huge markets for its coming products.

    Can a 500B company grow at 50% for years to come? No. But they can add 50 billion a year for a decade or more.

  • Report this Comment On June 01, 2014, at 5:14 PM, H42Tin wrote:

    What do you know about AAPL options?

    What will happen to the different options when the stock split occur?

    Will they issue new options with same expirations or will they be adjusted contract price and new options or just cash at time of split?

  • Report this Comment On June 08, 2014, at 3:33 PM, stfxdcx wrote:

    All the info on the stock split & nothing about the dividend treatment. What's happening with the dividend?

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