Shares of Apple (NASDAQ:AAPL) rose nearly 3% on Tuesday in part due to speculation that the company would split its stock, thus paving the way for its addition to the Dow Jones Industrial Average (DJIA). For those who are unfamiliar with the construction of the index, stocks in the DJIA are weighted according to price as opposed to market cap. Therefore, the higher the stock's price, the higher that stock's weighting in the index. Given that AAPL is such a high priced stock, if it were added to the Dow at its current price, AAPL's weight would be over a quarter of the entire index.
In the table below, we highlight what AAPL's weight in the DJIA would be if the company split its stock and was added to the index. Given the fact that Kraft (KFT) plans to split up its snack food and grocery businesses later this year, there is a good chance that the stock will be removed from the index after the split, paving the way for a new addition. Therefore, in the table below, we have provided figures as to what AAPL's weight in the DJIA would be if it replaced KFT.
Assuming that AAPL did not split its stock but was still added to the DJIA (an unlikely scenario), the stock would have a 26.7% weighting in the index. However, even if the company split its stock on a 2-1 or 3-1 basis, Apple would still be the most heavily weighted Dow stock with weightings of 15.4% and 10.8%, respectively. If AAPL split its stock 4-1, it would command an 8.3% weighting, putting it in second behind IBM at 10.7%. Amazingly, AAPL could split its stock 10-1 and still have a heavier Dow weighting than more than half (16) of the remaining 29 components. Finally, based on Tuesday's closing price, a 20-1 split on the part of AAPL would give the stock a share price of $30.54, which still puts it at a higher weighting than eight Dow stocks.
Looking at these numbers, one would assume that if AAPL were to split its stock to make it eligible for inclusion in the Dow, the split would be by just enough to make its weight reasonable but still the largest in the index. This would be justified since Apple is already the largest company in the world by a wide margin. Based on this, we wouldn't expect Apple to split its stock by any more than 3-1. Even on that basis, however, the weighting of the Dow would be extremely top heavy. The two most heavily weighted stocks in the DJIA (AAPL and IBM) would have a weighting nearly equal to the weighting of the bottom fourteen components combined.