In April 2014, Apple (AAPL) announced it would split its stock for the first time in nine years. Effective June 9, the 7-to-1 split had no immediate effect on Apple’s market value other than increasing float sevenfold. By drastically lowering the individual share price, the blue chip tech company appears to be focusing on shareholder value and offering the small-scale investor a piece of the Apple pie. Amid rumors of upcoming product developments, the aim of Apple executives is likely to be shareholder confidence.
Stock Split – What Does It Do?
Technically, nothing. Consider the most obvious example: you’ve just purchased an apple from the local market. Whether you cut it into two, four or seven pieces, you still end up with the same amount of apple regardless of the individual slices on the table. The same logic applies to stock splits. Apple’s market value remained the same immediately post-split, but its float increased by a factor of seven.
Accordingly, stock price must be divided by that same factor. On the Friday before the split, Apple shares closed at a trading price of $645.57 apiece. After the weekend, Apple stock proliferated and opened on Monday at around $92 per share.
So, Why Split Your Stock?
Stock splits tend to add short-term momentum to share price. Though in theory they should have no effect on market value, splits tend to work on a psychological level. Previously expensive stock becomes more affordable for the average investor, and for “round” investors who purchase stock in large quantities, a lower price per share offers them the opportunity to do so.
At a 2011 meeting with shareholders, Apple CEO Tim Cook shared that he and Apple’s Board of Directors found that “a stock split does nothing.” However, his introduction of dividends in July 2012 and the recent stock split suggests Apple has moved from a solely growth-focused company and instead looking for new ways to preserve value for its shareholders. This suggestion is supported by the addition of as much as $90 billion in share buybacks in April 2014. Combined with the 8% increase in the dividend, that brought the company’s total capital return program to $130 billion.
Apple stock began a seven-month slump in September 2012, only slightly gaining in mid-April the following year upon news of the iPhone 4S and 5 series’ release that was to come in September 2013. Though not decreasing as drastically as it had in the year prior, Apple’s stock was down from December 2013 to May 2014. But, it has been gaining ground in the past month as the big split approached.
Stock Split May Help Apple Reach New Highs
Just before plunging to $390 per share seven months later, Apple stocks reached an all-time high in September 2012 at $705.07 per share. That record, adjusted post-split, is $100.72. It remains to be seen whether the psychology of stock splits will help Apple surpass its former peak.
There has also been talk of Apple’s inclusion on the Dow Jones Industrial Average (DJIA). The DJIA is price-weighted, so Apple’s former stock prices have made it impractical to include. All companies included in the market benchmark currently trade at less than $300; Apple’s stock split and lower share price may improve the likelihood of an Apple dish on the Dow menu.
Under Steve Jobs, Apple was historically a profit hoarder, pumping all revenue into R&D rather than dividend payouts. However, with falling stock value, Tim Cook has slightly shifted Apple’s focus toward the shareholder. However, there is nothing in Apple’s current development strategy that suggests it is moving from a growth-oriented technology innovator to a company focused on shareholder returns.
In the past three years, Apple has spent most of its time releasing new software and updated series in its core products — the iPhone, Macbook and iPad — with a few quiet refinements of the iPod and iMac scattered throughout.
Apple executives recently met with the FDA to discuss regulations on wearable devices, suggesting further developments in the iWatch and health-related products. The company has also submitted a patent for solar cell technology with the prospect of a borderless touch screen on the horizon.
Given Apple’s interest in groundbreaking products involving wearable technology, stock strength, and consumer faith is key. The recent stock split appears to be another appeal from Apple execs to shareholders: the tech leader is maintaining its strong history of innovation, now with an increased focus on boosting investor value.
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