Memo To Tim Cook: Do Not Split Apple Stock

| About: Apple Inc. (AAPL)
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The droning drum beat to split Apple (NASDAQ: AAPL) stock will only intensify with every tick that shares move above the $600 mark. For some reason, sheep-like retail investors, institutions, and financial professionals believe that stock splits are a marker for success. Rank-and-file amateurs, of course, always seem to limit their analyses to nominal share price in order to determine whether shares are "expensive" or "cheap." Alternatively, intelligent investors realize that nominal share price is inconsequential to performance. Going forward, Apple's refusal to split its stock will reinforce its counterculture status and could very well lay groundwork for this generation's Berkshire Hathaway (NYSE:BRK.A).

Stock Split Sleight of Hand

Stock splits, economically, mean nothing. If Apple were to split its stock two-for-one, then investors would receive two shares for every one share that they held, while the corporation simultaneously halved its share price. Right now, if you held 20 shares of Apple stock at $600, you would receive 40 shares of Apple at $300, if the corporation were to split its stock 2:1. The size of your investment would remain at $12,000, before and after the proposed stock split.

In terms of financial statement analyses, some of Apple's nominal data would adjust, but the corporation would still retain the same valuation metrics. To prove this, we can research the important interplay between net income, earnings per share, shares outstanding, and price-to-earnings ratio. In 2011, Apple raked in $25.9 billion in net income, which would remain the same, regardless of any stock split. The $25.9 billion covered 924,258 shares outstanding, which breaks down to $28.05 in earnings per share. At $600 per share, we would then say that Apple trades for 21 times trailing earnings.

Immediately after the proposed 2:1 split, Apple would then post $25.9 billion in income over top of 1,848,516 shares outstanding. Earnings per share would consequently be halved to $14.03 and Apple would trade for $300. At that point, Apple would still trade for 21 times trailing earnings, and we would be right back to our original starting point.

Share price, by itself, is arbitrary.

Share Price Volatility

People who gauge business value solely through nominal share price are less likely to be sophisticated investors. A stock split by Apple would make shares appear "cheap" and bring increased numbers of inexperienced retail traders into the fold. These novices are likely to exacerbate volatility in shares, as they may pile on and abandon positions at key technical benchmarks, irrespective of underlying business fundamentals.

In a paper written for The Journal of Portfolio Management, finance professors Dan French and David Dubofsky state, "volatility does increase after the split is effective." Taken one step further, Chun-nan Chen of Syracuse University hypothesizes that smaller traders prefer lower priced shares, which fosters additional volatility when these people frequently open and close out positions.

I therefore believe that it is in Apple's best interests to refuse to split this stock - so that the corporation may attract and retain a solid base of knowledgeable, long-term investors. A stable share price is critical, if Apple has any future plans for an all-stock acquisition.

Berkshire Hathaway

For years, Warren Buffett refused to split his Berkshire Hathaway (BRK.A) stock (Berkshire Hathaway Class B split 50-for-1 in 2010 to help finance the Burlington Northern acquisition) for the very same reasons mentioned above in this article. Says Buffett in his 1983 letter to shareholders, "A hyperactive stock market is the pickpocket of enterprise." According to Buffett, stock splits are more likely to line pockets for fat cat bankers, than they are to generate long-term shareholder value. On April 27th 2012, Berkshire Hathaway Class A stock closed at $120,925. 542 shares traded hands on the session.

Maybe Apple is the next Berkshire Hathaway.

Disclosure: I am long AAPL.