- Apple may have removed the biggest hindrance to joining the Dow Jones Industrial Average - its stock price - by announcing the 7-for-1 stock split.
- CEO Tim Cook said that the split was done “to make Apple stock more accessible to a larger number of investors.”.
- After the split, Apple would maintain a middle of the pack weighting in an updated Dow Jones index.
- Cisco, Microsoft and Intel could be prime candidates for removal from the index.
The big news of the day is obviously Apple (NASDAQ:AAPL) and its blowout earnings report. After giving analysts and investors alike reason for concern after recent quarters' earnings - mostly related to product demand and future product cycles - Apple managed to report a little something positive for just about everybody. In addition to solid earnings buoyed by optimism surrounding the iPhone6 and the iWatch, Apple announced an increased dividend, a $30 billion share buyback and a 7-for-1 stock split. Apple's 2nd quarter earnings analysis will be well covered but it's the stock split that intrigues me most as it might be the last obstacle that stands in the way of Apple finally joining the Dow Jones Industrial Average.
The Dow looks for companies that are economic and industry powerhouses and Apple fits the bill among current non-Dow stocks as well as everybody. It's the biggest company according to market cap and its iPhone, iPad, MacBook and soon to arrive iWatch products have been incredibly influential to the global economic landscape in the past decade. In short, Apple is exactly the type of company that should be used as a global benchmark.
The only hindrance was the company's stock price. Being a price-weighted index, the Dow gives more influence to companies with higher stock prices. Visa (NYSE:V) and its current $208 share price have the biggest weighting in the Dow at over 8%. Cisco (NASDAQ:CSCO) is at the bottom of the list with a weighting of just under 1%. Apple and its price tag of roughly $550 would have had an almost 20% weighting in the index. That would have been too much influence even for a company as big as Apple and it was widely accepted that as long as the stock price was that high its inclusion in the Dow wouldn't happen.
Now that obstacle is gone. At a price of $75 to $80, Apple would be right in the middle of the Dow pack. Apple had been fairly reluctant to split the price of the stock in the past although it's not without precedent. Apple split its price twice in the recent past - 2000 and 2005 to be exact - but those were more traditional 2-for-1 splits. A 7-for-1 split raises a little more curiosity.
During the earnings conference call, CEO Tim Cook mentioned that he wanted "to make Apple stock more accessible to a larger number of investors." While that is technically true, there's not a great deal of difference between buying 7 shares at $75 versus 1 share at $525. You have to wonder if the stock split was done with at least a small consideration of Dow inclusion.
The Dow Jones average has made component changes in each of the last two years and a total of nine stock swaps since 2008 [including changing Kraft (NASDAQ:KRFT) both in and out]. So the Dow Jones company is certainly willing to update the index when necessary. Technology is currently one of the largest weights in the index so it would seem likely that it would want to balance out the technology influence by replacing a current tech name. Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Cisco have the smallest current weightings among technology names and any of those would be a prime candidate for removal.
Apple's place in the world economy is well established. Now that it's planning to split its stock, the company's official inclusion in the most widely recognized market index in the world may be imminent.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.