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.

Bob Ciura
Bob Ciura
Apr 28, 2014 at 1:05PM
Technology and Telecom

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.

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