In an article authored last month, I suggested several ways an Apple stock split could add value for shareholders. Today, I want to look at why Apple (AAPL) might not want to split its shares. It's funny that even though the math shows there's no direct value-add to a share split, we can still think of so many reasons why a share split might add value, and at least a couple reasons why a company might not want to split its shares. Certainly, it's a nice problem to have, and one that Apple's rivals Research in Motion (RIMM) and Nokia (NOK) probably wish they did.
One reason why Apple might not want to split its shares could be why Warren Buffett keeps from splitting the share price of Berkshire Hathaway's (BRK.A) common shares. Berkshire's shares were priced above $126K, give or take a few hundred dollars, as I scribbled away here. Mr. Buffett argues that by supporting such a high price point for Berkshire's shares he keeps frivolous investors out. The stock then theoretically trades with less volatility, as only serious long-term shareholders are on board. Berkshire's beta of 0.25 would certainly seem to support that argument.
However, even Warren Buffett has found a way to get around the problem of raising capital most optimally while keeping volatility under control. The company offers B Class shares which trade at approximately $84 under the symbol (BRK.B). The B Class shares are not affected by supply and demand for them, but are hinged to the A Class share action. Also, they offer a fractional voting right versus the rights of the A Class shares. You can think of the B Class shares as a fractional common share, because that is really what they are. Owning a B Class share was equivalent to owning 1/1500th of a common share of Berkshire last I checked. So why doesn't Apple create a B Class in order to maximize its capital opportunity and satisfy retail investor interest in the company? It's a good question, and so perhaps Apple will create a B Class soon enough.
Another reason why Apple might not want to split its stock could be because of the mathematical impact such a change would have upon its ability to manage earnings results. As the company increases its share count, like through a share split, it will lower its earnings per share figures. Net income will of course remain at the same degree, but it will be broken up between more shares in the EPS count. By increasing the denominator in that calculation, it gets harder to get to that next penny per share; you need much more net income to get there. Thus, it gets harder to manage and beat Street estimates. Let's illustrate this:
Apple's Current Vs. Post 10:1 Split Analysis
Earnings Needed to Get Penny More EPS
FY Q4 (Currently)
FY Q4 After 10-for-1 Split
As you can see, the increase in shares makes it harder to manage earnings, and so to beat the Street's consensus estimate. Considering how important it still is today to produce results that not only illustrate healthy growth, but beat Wall Street's expectations, which are built into the share price, we can understand why Apple or any company might shy away from share splits. In Apple's case, in order for it to bring its share price down into what many consider an optimal range, it would have to split its stock 10 to 20 times.
These figures are illustrative of the magnitude of importance of Apple Incorporated today. Perhaps they also help shareholders and prospective investors in Apple to understand what might be keeping the company from splitting its shares. It is also useful to investors in similarly "expensive" stocks, like Google (GOOG) and Priceline.com (PCLN) to perhaps understand why their shares are trading at similar heights.