Understanding Apple: Flash – Stock Split coming?
Jaan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Reuters recently reported that according to Bernstein Research, Apple (NASDAQ: AAPL) is considering a potential stock split.
The article notes that this might allow for inclusion in the Dow Jones Industrial Average which has only two companies that trade for over $100. To get to that figure Apple would need to do a 6 to 1 split or higher. To stay in that range, leaving for another doubling, it would need an even higher ratio.
Apple has had three 2-for-1 stock splits:
June 15, 1987
June 21, 2000
February 28, 2005
In February 2005, it was trading in the $80 range before the split.
Analysis
Essentially a split does nothing real for the value of a stock. The total company valuation does not change. For a 2X split, each shareholder receives 2 shares for each one he holds, but the value per share is ½ the former price. On the company side, there are twice as many shares, but again, each is at half the price so the overall Market Cap is the same.
Besides potential inclusion in the DJI, a split to a below $100 price per share would encourage smaller investors to purchase. There is something inherently unsatisfying in holding one or two shares in a company. Psychologically, I think that being able to hold even ten makes a difference.
Apple seems to pay little attention to the market's whims. Indeed (as I argue in a previous post on their success) they have provided unprecedented growth precisely by doing this. So why they would consider it now is a bit of a mystery.
We can look at what happened during the last stock split on 18 February, 2005. The split was announced on the 11th. On the charts below, a dark circle with an “S” marks the split. On some, the dot marks the 11th.
We can see that on the first chart, “7 weeks,” that the announcement and split seemed to drive the stock higher in the short term, with larger than normal volume on the 12th, but the price soon dropped back to its former level ($39.83 on 9 Mar), and later dropped even lower, to $34.13 on 12 May.
If we look at longer term charts such as #2, “9 Aug-04 to 5 Dec-05 + sma 200,” then we see that all this was merely a blip on the constant rise that started before the split and continued afterword pretty much uninterrupted. Whether the split itself actually had any impact on this rise is something on which we can speculate, but no one could ever really know. But since Apple has continued its rise ever since, passing long ago the price at which the split was actually made, it is unlikely that the split itself had any significant impact. The third chart shows Apple from just before the split up to the current day. Please note that it is on a logarithmic scale. It compares Apple’s rise with that of Google (NASDAQ: GOOG), Hewlett-Packard (NYSE: HPQ) and the NASDAQ. It shows very well this continued rise of Apple’s share price.
Finally, chart number four shows pretty much the same as number three but is no longer on a logarithmic scale. It is thrown in for impact. It might be noted that While Google has done fairly well in this time frame, it has yet to regain its pre-2008 height of $714.87. HP and Research In Motion (NASDAQ: BBRY) more or less tracked with Google until 2011 when each began to decline.
Conclusion
It is likely that any split in Apple shares will cause a brief increase in interest right around the time of the announcement, right up until some days or weeks after the actual split itself. Long-term effects, however, most likely will not be significant. Except for one thing.
If Apple does split, as Vipal Monga points out in a WSJ blog, it may be one of the largest splits ever. (Large, that is, in N-to-1 ratio.) It would take a 6-to-1 split to bring it even close to $100, and more to bring it below. This could potentially affect the overall availability of the stock to smaller investors. According to Monga, “Only the 10-for-1 splits by Capital Cities/ABC, (ABC is now owned by Walt Disney (NYSE: DIS)) in 1994 and Metromedia in 1983 were larger.”
In the end, we shall see.
Chart #1: Apple 7 Weeks chart surrounding 2005 split of Apple
Chart #2: Apple, 9 Aug-04 to 5 Dec-05 + sma 200
Chart #3: Apple Jan 31, 2005 to present. (log scale)
Chart #4: Apple Jan 31, 2005 to present. (normal scle)
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Malcolm Manness has a Masters degree in Computer Science, and has worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years.
His short fiction can be found (under pseudonym J. Seunnasepp) at http://50CentFlash.com/.
==== Understanding Apple series
You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.
Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.
Let me know what you think.
JaanS is long Apple. The Motley Fool owns shares of Apple, Walt Disney, and Google. Motley Fool newsletter services recommend Apple, Google, and Walt Disney. 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.If you have questions about this post or the Fool’s blog network, click here for information.
