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Why the Apple Stock Split Bodes Poorly for the Dow

By Will Healy – Aug 7, 2020 at 11:17AM

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This goes beyond Apple's reduced influence within the index.

One of the more notable announcements to come from Apple's (AAPL -1.38%) latest earnings report was a 4-for-1 stock split, the company's first since 2014. The stock split takes effect on Aug. 24.

In a real sense, the stock split means little. It makes no difference to most investors whether they own one share of the tech stock worth about $440, or four shares worth about $110 per share.

However, Apple is one of the 30 stocks that make up the Dow Jones Industrial Average. While that may not seem initially important, a high nominal price increases the stock's influence in the Dow index.

And instead of helping the Dow, this stock split may point to the index's increasing irrelevance. Here's why.

Man holding phone while looking at stock charts.

Image source: Getty Images.

Apple and the Dow index

The Dow Jones Industrial Average has existed since 1896. Over time, it has become one of the standards by which investors gauge the performance of the overall market.

However, the Dow is a price-weighted index. In other words, the average price of all 30 Dow stocks drives the index. For example, a stock trading at $100 a share has 10 times the impact on the index of one trading at $10, regardless of the size of the companies. This means that a higher nominal stock price translates into more influence over the index's movement.

Apple stated during its earnings results that it wanted to make shares "more accessible to a broader base of investors." However, the company offered no further justification for the stock split. Also, in a world where investors can buy fractional shares, nominal price is not an obstacle to accessibility they way it might have been in the past.

Apple will lose about three-fourths of its influence over the Dow following the stock split. The 4-1 split will reduce Apple's weighting in the Dow from about 11.2% to around 2.7%. Conversely, this also means that the Dow will initially see 75% less benefit if Apple's stock price march higher continues.

Investors should note that Apple joined the Dow index in 2015, and the company executed a 7-for-1 stock split on June 9, 2014. It was a general assumption at the time that the 2014 stock split was specifically done to help make Apple a suitable candidate for potential inclusion in the Dow.

AAPL Chart

AAPL data by YCharts

The S&P 500 doesn't face these issues with Apple being among its component stocks. Not only does the S&P use 500 different stocks to generate its index figure, but it measures stocks differently. Instead of nominal stock prices, the S&P measures stocks by their market capitalization. This means that Apple's influence over the S&P will remain unchanged by the split.

Business news outlets still feature the Dow Jones index prominently in their reporting on the broader markets, and it remains a widely followed market indicator. Moreover, a split does not hurt Apple stock. Since a public spat over the Dow's efficacy is not helpful to the company, Apple may have simply chosen to go along and get along.

Splits are not always the norm

Investment gurus such as Warren Buffett remain leery of the stock split concept. Berkshire Hathaway A shares sell for about $300,000 per share. The company later issues B shares worth a small fraction of their counterparts. The B shares have also split before. Nonetheless, the A shares remain unsplit, and Berkshire never became a Dow stock.

Other companies have adopted this no-split view in recent years. Amazon, which approved stock splits early in its history, has now moved above $3,000 per share. Its last split occurred in 1999.

The only split for Alphabet stock came in 2014 when the company, then known as Google, split shares into A shares with voting rights and C shares without voting rights. Even relatively smaller companies such as Booking Holdings and AutoZone have allowed their stocks to rise to high nominal prices.

What the future may hold

With Apple's split, the attention now turns to the Dow's other most valuable companies. Perhaps UnitedHealth Group (shares currently priced around $316) or Microsoft (shares currently priced around $215) will vote on a similar split in the near future as their stock prices march higher.

However, the list of large, influencial companies sporting outsized share prices that the Dow cannot add to its index because of their price continues to grow. In the end, reducing Apple's influence may end up hurting the Dow more than helping it.

Thus, instead of helping Apple or the Dow, the unexpected beneficiary of the stock split could become the S&P 500. Time will tell.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Will Healy owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Booking Holdings, and Microsoft. The Motley Fool recommends UnitedHealth Group and recommends the following options: long January 2022 $1920 calls on Amazon, short September 2020 $200 calls on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2021 $85 calls on Microsoft, long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$140.94 (-1.38%) $-1.97
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,597.92 (0.00%) $1.58
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,933.92 (-0.19%) $-7.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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