The Psychology Behind Apple’s Stock Split
Last week, Apple reported their earnings for the first quarter of 2014. It is safe to say these numbers were quite impressive. Additionally, they announced an 8% hike on their dividend and increased their stock buyback program by $30 billion. However, the biggest news was when they announced a 7-for-1 stock split, which will bring their share price from $565 to approximately $80. A stock split is a corporate action that increases the number of shares by dividing each share, which in turn diminishes price. To make it simple, it is like turning $140 into seven $20 bills. The shareholder will own more shares of the stock, but the total value of all of the shares remains the same.
Although a stock split may seem pointless given the value remains the same, companies still do them for a three key reasons:
- Increased Liquidity: By increasing the number of shares available for purchase, the liquidity for that stock will rise. Increasing liquidity results in lower costs for trading.
- Marketability: A lower stock price makes that equity more attractive to smaller investors who want to own more than a few shares. For example, smaller investors cannot afford to buy a share of Berkshire Hathaway (BRK-A), which has never split its stock and is now trading at $190,000/share. The cost is of one share too high and is often prohibitive and/or undiversified.
- ESOPs: An Employee Stock Option Program (ESOP) is designed to pay employees with company stock, and a lower price allows management more leeway to pay its employees.
Our Investment Committee added Apple to the Conservative Income Portfolio (CI) in February of this year. At the time they saw an attractive dividend payback and lots of room for growth in the coming months. Now, our Investment Committee believes that Apple is positioning itself to be included in the Dow Jones Industrial Average Index (Dow), which is one of the most popular equity indexes in the world. A stock that is priced in the $500+ range would have an outsized impact on the Dow Index price. By contrast, Apple would be a great fit if priced in the $80 range of the index.
A stock that gets added to indexes like the Dow & S&P 500 will often rise in anticipation of big institutional investors buying. For instance, a mutual fund that tracks the Dow Index is usually required to own every stock in the index. If Apple were added to the Dow then this manager would need to add Apple’s stock to their mutual fund. In other words, increased institutional demand for Apple’s stock could cause the value of the stock to rise even further.
To sum it up, a stock split may do nothing to the value of firm equity, but Apple was making this move to attract more long-term investors. Investors may finally take notice of a company that is printing money, growing its attractive dividend, buying back $130 billion of its shares in total, and is “stupid cheap” according to our Investment Committee.
Read this week’s Thought of the Week to learn more about Apple and their recent stock split.
Click Here for the Weekly Thought As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.