Why is Apple Shying From a Split?
Jyoti is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL) currently trading at around $690 - $700 has been in the news for many reasons. The release of iPhone 5 was something that everyone was looking forward to. The news did help boost the share price of Apple. Apple has outperformed the index by a huge margin with shares increasing at around 75 percent as compared to the index which increased only 23 percent.
*Chart Souce : Http://investor.apple.com
The Dow Jones Industrial Average (DJIA) contains 30 of the largest and most influential companies in the U.S. This index is sometimes also referred to as “the market” as it is one of the most recognized indexes in the world. Currently there are five tech companies in this index – International Business Machines, Hewlett-Packard, Microsoft Corp., Intel Corp. and Cisco Systems. Apple recently initiated a dividend to its share holders after 17 years, one of the other criteria to enter into the Dow Jones. The way the index is calculated it would need to split its shares in order to be added to the Dow. Because the way the index is calculated, it gives additional weight to a company with a higher stock price.
What is a Stock Split?
Stock Split by book definition – “An issue of new shares in a company to existing shareholders in proportion to their current holdings.” Basically it means that if company is trading at, say, $100 and it decides to split its stock in a 2:1 ratio, then if I have one share of the company I would be entitled to receive one more share of the company and the prices would reduce to $50. The total valuation of the company does not change, only the number of shares outstanding in the market change. The primary reason why companies opt for a stock split is to make the shares more lucrative and affordable to the small investors.
Microsoft Inc. (NASDAQ: MSFT) already has gone through eight splits since its public listing in 1986. The last time it split was in February 2003. The company went for a 2:1 stock split. The shares were trading at a high of $48.30 before the split. The company had various ups and downs, due to many factors, especially during the recession period (around 2009), where the stock was at its all time low. Yet if we see the overall valuation of the company, it is more than what it was in 2003.
What is Stopping Apple from a Split?
Apple one of the most innovative companies has taken Smartphones and Tablets to a different echelon in this tech world. It is trading at its all time high and thus it would possibly be the best time for it to go for a stock split. Then what is stopping Apple from doing so? Let’s take a look at the possible reasons:
Share Valuation: The total market capitalization does not change because the number of shares increased is adjusted with the proportionate decrease in the price of the shares. However, without a closer look at a stock’s total market capitalization and its total amount of dividend distribution, investors may perceive a company with a lower stock price as a less valuable company. With the iPhone around the corner to hit the market, Apple would not like to give the market any such indications.
Price Volatility: The decrease in price makes it more 'affordable' to small investors; there is no second thought about it. But at the same time, the reach to a larger number of investors makes the stock more volatile making it more risky in the market. Apple would certainly not like to jeopardize its existing faith in the investors in lieu of few small traders to pounce in.
Earning Expectations: Generally a company which is very confident of its future earnings goes for a stock split. This is because they are sure the decrease in price helps its shares to increase more than they would increase had there been no split. But it also puts the company under tremendous pressure to meet its forecasted figures. Apple is facing stiff competition in the market today from its competitors especially Samsung, and the upcoming windows 8 version of Nokia – Lumia 920. The news for the release of iPhone 5 had mixed reviews in the market, creating an uncertainty of its future earnings.
What if Apple decides to do a Split?
Apple is currently the only company above $215 billion in market capitalization, that pays a dividend and is still not listed in the Dow Jones. This is not the first time Apple would be doing a stock split. It actually had three stock splits before this in a ratio of 2:1 – in June 1987, June 2000 and February 2005. This time though if it goes for a split it would possibly need to go for a 4:1 stock ratio, if it is keen in joining the Dow Jones index and increase its marketability to all investors. The inclusion of Apple in the Dow Jones would give it a boost, since any index funds based on the indicator would be forced to buy Apple shares.
There are some $450 odd billions invested in ETFs, and if we take a rough 20 percent of it on DJIA, keeping 5 percent weight on Apple, It would simply mean that Apple’s shares would increase by 1 percent of its market capitalization. Not only that, the iPhone5 is about to hit the market, which many consider it to be a revenue booster for Apple . Thus this is possibly the best time for it to go for a stock split.
Who will be the Possible Replacement?
Hewlett Packard (NYSE: HPQ) is on the firing line, if Apple makes it to the top 30. The reasons are but obvious. Over the last six months, the way HP has performed is certainly not helping its cause, the shares have dropped around 23 percent. The quarterly results did not meet the expectations, the revenue has been slipping down and the company made an announcement of job cuts (the count reaching as high as 29,000). Recently, United Health replaced Kraft in the index. No award for guessing who would replace HP!
Conclusion
The company has not given any signs of a stock splits for now. The board gave an indication in March that they do not consider stock splits in favor of their investors. But since March the share price has increased by around 20-22 percent (A mamoth change considering the short time span of only five months). This would lead to the board to sit down again and think of the possible options. The pros and cons are always associated with each decision a company makes. But it’s a question of "High Risk/High Gain." Will Apple decide to take this risk of making its shares a little more volatile in order to capture a higher number of investors in pursuit of joining the Dow Jones Index?
Dig Deeper
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jyotiadvisor has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
