Apple’s first stock split since 2005 takes effect today, but the computers that track the stock price often forget to take that into consideration (above).
Why the 7-1 split? The lower buying price may open the door to more investments from smaller investors, and the ~$100 price would let it major indices list AAPL, opening the door to more investment.
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It wasn’t just Apple’s earnings and iPhone sales that took people by surprise yesterday: the company also announced a 7-to-1 stock split.
A stock split is where a company divides one expensive share into two or more cheaper shares. In theory, there’s no benefit to this: it’s just like splitting a $100 bill into two $50 bills. You end up with the same amount of money and the same share of the wealth. But in practice, a lower share price tends to encourage investment, partly because it allows smaller investments and partly because stock splits tend to signal that a share price is likely to continue to increase.
Most stock splits are 2-to-1, sometimes 3-to-1. A 7-to-one split is highly unusual, and in yesterday’s earnings call, Tim Cook explained the reason (via Business Insider).
We are taking this action to make Apple stock more accessible to a larger number of investors. Each shareholder of record at the close of business on June the 2nd, 2014 will receive six additional shares for every outstanding share held on the record day and trading will begin on a split-adjusted basis on June the 9th, 2014.
It’s a move not without risks. By reducing the share price, you make it easier to buy and sell stock, which can make the share price more volatile. But Apple’s board of directors probably figure that small investors are more likely to be those with loyalty to the company rather than the big institutional investors who may take a much more short-term view.
Vox also points out that the lower share price (a $550-ish share today will be split into seven $80-ish shares) would make AAPL eligible for inclusion in the Dow Jones Index. Surprisingly, inclusion in the index is not automatic, based on company size, but is a decision made by a committee – which until now has excluded Apple.
If a company with a very high share price — like Apple before the split — joined the index, it would badly skew the index. This has kept Apple out of the Dow even though as the country’s largest or second-largest company, it clearly deserves to be in.
Again, there’s no practical benefit to being included in the Dow, but it may make the stock attractive to more conservative investors who view the index as a list of ‘safe’ companies.
Apple’s stock share price has risen today, after being down this morning, due to a rumor of an imminent stock split announcement. SeekingAlpha points to a tweet from The Street’s Doug Kass that seems to be the original source of the rumor. Apple’s next shareholder meeting will be held tomorrow, and this is where the announcement is rumored to take place.
We’d caution that this is just a rumor (if reliable, why didn’t he post it on the Street.com?)at this point and Kass’s past hits include things such as:
“I am also hearing that Google CEO Eric Schmidt has already begun low-level discussions with several Apple board members regarding his role as a possible temporary replacement to Steve Jobs should the options-backdating issues intensify at legal levels.”
Also Kass has a big personal interest in AAPL’s share price:
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A new report from business weekly Barron’s (via Reuters) claimed The Dow Jones Industrial Average stock index could potentially replace stocks from Alcoa, Bank of America, or Hewlett-Packard with Apple or Google. There’s no exact timeframe for the overhaul of the index, but Barron’s said adding the companies would be complicated due to the fact the Dow calculates the absolute price of shares. Reuters explained that getting Apple would require the company to split its shares:
Apple, whose shares on Friday closed at $603, would overwhelm the index with a 26 percent weighting. That is double the influence of current Dow component IBM, whose $207 stock price gives it a 12 percent weighting in the index, Barron’s said.
Barron’s said the heavy weighting that Apple would command at its current share price could prove a barrier to becoming a Dow component. To guarantee a Dow spot, Barron’s said, Apple would have to split its shares by five-for-one or 10-to-one. But Barron’s noted that Apple has not split its stock since 2005.