What Can Shareholders Expect From Apple's Stock Split?

Is Apple's stock split really as great for shareholders as everyone seems to think it is?

Jun 12, 2014 at 6:00PM

In case you've been living under a rock and missed the hundreds of articles, discussions, and analyses of the Apple (NASDAQ:AAPL) stock split, shareholders now have seven times as many Apple shares in their trading accounts. This occasion seems like a good opportunity to discuss the basics of what exactly a stock split is and why Apple shareholders should be happy about it. 

Why would a company issue a stock split?
Sometimes, the stock of a company like Apple will climb so high that its price is hard to afford for many average investors. Rather than allowing high prices to discourage buyers, the company will issue a stock split.

When a company issues a stock split, they are literally splitting the shares of stock into pieces. For example, the recent Apple stock split was 7:1. If you owned 10 shares at $644 per share before the split on Friday, you owned 70 shares at $92 per share on Monday morning.

Since the pizza analogy has been beaten to death, let's use an apple pie: more slices does not mean more pie. The market cap of Apple did not change. Notice that there is no inherent value creation or destruction that results from the split itself: before the split you owned $6440 worth of stock, and after the split it is still $6400 worth of stock until trading starts on the day of the split.

Why is a stock split a good thing?
Stock splits are generally seen as a good thing for investors for two main reasons.

  1. The stock split lowers the cost of shares and psychologically makes the shares seem more appealing to investors.
  2. A company usually only issues a stock split if its share price has risen significantly in the past. Therefore, a company issuing a stock split likely has a stellar performance history.

So there you have it. Despite the fact that the split itself does not directly create value for shareholders, it's typically a good thing. From the Wall Street Journal:

Several studies have found that the average stock undergoing a split outperforms the overall market by a significant margin over the three years following the company's announcement of that split. 

A word of caution to Apple shareholders
Before Apple shareholders get too excited about the stock getting to $120 in the next month, it's important to understand two caveats to Apple's stock split scenario:

  1. Post-split stocks tend to outperform the market. Outperforming the market could mean that the stock gains 10% while the market gains 5%. Or it could mean the stock loses 5% while the market loses 10%. The stock market does not rise in perpetuity without corrections and bear markets along the way.
  2. Apple announced this stock split nearly two months ago.


For the sake of a smooth transition, the prices on this chart prior to the split have been adjusted to the post-split share count (by dividing by seven). As you can see, the stock was up more than 20% in the past three months prior to the split. This climb makes sense because lots of people want to buy before the split happens expecting that the split will lead to a rise in share price.

This anticipatory buying drives the price up before the split actually takes place. Notice that the Wall Street Journal article specifically referenced the date of the "announcement" of the split rather than the date on which the split actually occurs.

What does the post-split future hold?
Apple's strong fundamental picture includes a relatively low valuation, continuing revenue growth, massive buybacks, and major expansion into China via China Mobile.

Apple's lower post-split share price and expected upcoming line of product launches should continue to drive the price higher over time, but shareholders shouldn't freak out if the next couple of weeks aren't as rosy as everyone seems to assume they will be. Don't be surprised to see some short-term Apple traders with high expectations lose patience and sell in the upcoming weeks. But after any short-term traders are flushed out, the stock should be free to follow the upward trend that most fundamentally strong stocks exhibit in the years after a stock split.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Wayne Duggan 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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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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