Apple (AAPL) has been the talk of the financial world for what, years now? Now up over 60% this year, the once "undervalued" tech giant is finally seeing its share price rapidly increase, as it has recently become the most valuable company ever traded. Now many are calling on Tim Cook, Apple's CEO, to split the stock, something many investors are either fully backing or fully against. But with Cook handling the reins, a stock split isn't completely out of the cards.
When Steve Jobs controlled the company, many thought there would be no stock splits, though it has split three times previously. But there also likely wouldn't be a dividend either, something Tim Cook implemented at Apple after only serving several months as the CEO. Cook isn't afraid to do things differently at Apple, things that Jobs refused to do. With a swelling hoard of cash on hand, investors continually demanded that Apple do something with it. Eventually Cook initiated a dividend. Now, as the price is approaching nearly $700, the call for a stock split has been ringing louder and louder throughout 2012. In my mind, Cook will answer, and inevitably deliver what the masses want.
The early investors, those who bought Apple under $100, for the most part, are begging that the split doesn't happen. Whether they bought more shares or not, is likely not the issue, it's the mentality of, "I bought it cheap and it's not fair to give others a second chance." They feel as though they did the homework, found a great company with future growth, now they want to be the ones to reap the benefits with 500%+ returns.
On the other hand we have the investors who are for the stock split. These are the late-comers who don't have enough bang in their account to soak in 100 shares for a current $67,034. They do however have $6,703.40 for 100 shares in a 10-1 stock split scenario. Retail investors largely missed their chance when the stock began rising and was trading at just $400 last January. Even then it was thought this might be too lofty a price for Apple, until you look at it now.
Six-month chart of AAPL, courtesy of Stockcharts.com
Apple splitting its stock would have certain implications. For example, let's say Apple split its stock 10-for-1. This would mean that for every 1 share of Apple, a stockholder would receive 10. Below I will demonstrate the math for those who are not familiar with stock splits.
1. Currently Apple trades for $670.00.
2. Apple splits its stock 10:1.
3. For every 1 outstanding share at $670, there are now 10 shares valued at $67.
By dividing the stock price by 10, while multiplying the share count by 10, the value stays the same. Hence 10 shares x $670 = $6700 (pre-split) and 100 shares x $67 = $6700 (post-split).
The first effect of a stock split would be the large amount of outstanding stock. Currently, Apple has 937 million shares outstanding. A 10-1 stock split would mean there would be over 9.3 billion shares now. Apple now trades with a beta of 1.2, meaning it is slightly more volatile than the S&P 500 (SPY). With more shares at a cheaper price, less experienced traders and faint-of-heart investors could get their hands on it, meaning a potential and likely increase in volatility.
Another immediate effect will be the sharp rise in price action. It would be likely that if Apple were available tomorrow for $67, a wave of buyers would be there to bid. Retail investors would be looking to add it their side portfolio or maybe one of their IRA's. 100 shares would only be a few thousand dollars now, rather than $65,000+. A split such as this could immediately drive the share price from the $60 dollar range into the $80's or more. In a recent Bloomberg video, Andrew Keene, who was once the biggest Apple options trader in the world, shares the same opinion.
It wouldn't just be retail investors buying either. We all know that hedge funds, mutual funds and other "smart-money" managers would be gobbling up the shares as well. With a dividend, Apple now appeals to many "Fixed Income" funds who hesitantly resisted Apple shares before, due to not paying out any distribution.
Another huge effect a stock split could have for Apple is the inclusion in the Dow Jones Industrial Average. Previous discussions of Apple being including in the Dow Jones has quickly been nixed, for one main reason: price. The Dow is a price-weighted index, meaning that the value of the Dow is calculated by the share price of its components rather than by market cap, such as the S&P 500. The addition to the Dow would create some instant demand, however small it may be. It would force index fund managers to go out and purchase Apple, since it is newly included in the index.
Also, the addition of mini options has many wondering if this is something that would be hinting at an Apple split. Among other companies that are being sought after for mini options are Amazon (AMZN), Google (GOOG), the S&P 500 ETF and the Gold Trust ETF (GLD). Google, many may remember as a company that had previously refused to split their stock, subsequently saying, "you thought we were a bubble? Look at us now." Well on April 12th, Google announced a 2-for-1 split, sort of. The new shares will have a no voting rights, a move that peeved a lot of shareholders, a lesson Apple can learn from by not making the same mistake.
Some interesting notes about Apple and the Dow Jones make it seem that the addition could be closer than we think. For instance, Apple is the only dividend paying company with a market cap north of $215 billion, that isn't in the Dow. Also, every component currently in the Dow pays a dividend, which Apple now does as well, having distributed its first payment August 16th of this year. "The timing is ripe," noted Toni Sacconaghi, an analyst for Bernstein Research.
Many will argue that stock splits serve no purpose. That since the market cap and the value of the company are uncompromised, all it does is change the price. But in many cases that is the purpose. Psychologically it does have an effect and we all know. Many of us who don't own Apple now, would gladly own a few hundred shares if they were sub-$100. Many retail investors aren't willing to shell out $100K to own less than 150 shares, but would thoughtlessly put out a buy order of $10,000 for them.
While a stock split may anger the "early bird investors," it shouldn't. Maybe they feel superior for being in on Apple before everyone else, but a stock split would fatten their wallets too. And while a split would likely make Apple stock more volatile in the short term, I for one think a split would be good. I feel as though Apple will have an easier time getting to $100 after the split, than it will getting to $1000 without the split. A stock split will create more traders, but in my mind will also create more buy-and-hold investors as well, especially with the addition of its recent dividend.
Disclosure: I am short SPY.