Shares of Apple (Nasdaq: AAPL) are trading around $260 apiece, which has many people -- and even some financial writers! -- calling for a stock split. Alas, these folks are letting their brains play tricks on them. Stock splits are mostly meaningless.
We're simply not rational creatures when it comes to prices and economic decisions. If a large soda costs just $0.20 more than a medium one, we'll often buy it so that we pay less per ounce, even though we really only want a medium-sized drink. We're essentially spending more for something that we don't want.
Price matters
With stocks, we tend to be attracted to lower absolute prices, even when that shouldn't matter. In fact, stocks priced below $5 a share, generally dubbed "penny stocks," are notoriously volatile and dangerous, while many stocks with high prices have market-beating performances. The companies below rank among the relatively few that sport prices above $250 per stub:
|
Company |
Recent Price |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
|---|---|---|---|
|
Apple |
$259 |
43% |
26% |
|
Intuitive Surgical (Nasdaq: ISRG) |
$334 |
45% |
25% |
|
Biglari Holdings (NYSE: BH) |
$299 |
(7%) |
5% |
|
Markel (NYSE: MKL) |
$341 |
1% |
9% |
|
CME Group (NYSE: CME) |
$286 |
0% |
N/A |
|
Google (Nasdaq: GOOG) |
$490 |
11% |
N/A |
|
Wesco Financial (NYSE: WSC) |
$337 |
(1%) |
5% |
|
S&P 500 |
(2%) |
(3%) |
Source: Yahoo! Finance.
Such stocks can be more promising than ones with more ordinary or lower prices. Their high prices, after all, suggest that their managements have long resisted calls to split their stock. That's a sign that executives may be less interested in looking good than in doing good -- more focused on their business than on what the market and investors think of them.
Countering arguments
Split advocates explain that if Apple's share price falls to $26 (via a 10-for-1 split), more investors can buy. But if you're interested in spending $2,600 on 100 shares of a $26 stock, you could always just buy 10 shares of an unsplit $260 stock. There are few stocks that most of us couldn't buy, in some quantity.
Others argue that a split will stop people from talking about how "expensive" the stock is. Perhaps, but they could then start talking about how inexpensive it is, when even a $26 or $8 stock could be too expensive. What really matters in stock valuation is how the stock price relates to other company factors, such as earnings, cash flow, book value, or various growth rates.
More interesting questions to ask about Apple would be whether it should pay a dividend with its $10 billion in cash, or what companies it should buy to boost its business. While significant issues like those remain unanswered, you shouldn't waste any time thinking about splits.
Dividends are much more exciting than stock splits. Here's "the best dividend stock."
