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I am a two-decade veteran of the investment business and am especially interested in technology investments.
  • Time Has Come for Apple Stock Split 0 comments
    Feb 9, 2010 6:42 PM | about stocks: AAPL

    Thanks to Warren Buffet and his Berkshire Hathaway policy of never splitting the stock in the belief that it limits turnover and ownership costs, higher stock prices are fashionable.  Google, the Washington Post Co., and Apple, Inc. all sport stock prices well into the hundreds.  However fashionable that might be, there comes a time when such a price becomes a hindrance.  For Apple, that time has come.  

    In its latest quarterly earnings release Apple reported that it has 906,282,182 shares outstanding.  Standard & Poors in its latest research note tabbed institutional ownership of Apple's shares at 71%.  Further, reported recently that Apple is the #1 holding amongst the 280 hedge funds that it tracks.  If institutions already own the majority of the shares outstanding, who then is left to buy the stock?  Individuals.  And therein lies the problem.

    Apple has tried and failed for more than two years now to surmount the $200 price hurdle.  With the recent change in accounting rules and the calculation that Apple could earn roughly $12 per share this fiscal year, the stock does not appear to be expensive on an earnings basis.  However, it is expensive on an absolute basis.  Investors prefer to buy shares in lots of 100.  Brokers charge more for odd lots and investors generally feel that 100 shares is a good place to start.  100 shares of Apple will cost a buyer about $20,000 currently and that is beyond the comfort level of many investors.  Splitting the stock 5:1 would bring that 100 share purchase down to about $4000 and would no doubt generate much excitement and buying interest among the individual investors and consumers who make the company's existence possible.

    Granted, the amount of shares traded each day by institutions dwarfs any total that individuals could ring up. Nevertheless, it appears as though individual investors are the last great province of potential ownership. A stock split would increase the frictional cost of ownership-it costs more to trade 500 shares of a $40 stock than it does to trade 100 shares of a $200 stock, but a 10% rise in the stock price would more than offset the marginally-higher cost of ownership.

    A 5:1 stock split also leaves Apple plenty of earnings wiggle room.  Companies do not like to report negative earnings, but with split-adjusted earnings estimates of about $2.40 per share, Apple should not have to worry about reporting any money-losing quarters. However, a 5:1 split would require a shareholder vote since currently the company only is authorized to issue 1,800,000,000 shares.  Currently, not even a 2:1 split is possible.  

    Individuals are Apple's lifeblood.  Without them as consumers, Apple has no business.  Shouldn't the management be cognizant of the fact that its customers probably also would like to be shareholders in a way that is significant to them, the individuals?

    Disclosure: Long AAPL

    Stocks: AAPL
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