What Apple’s 7-for-1 Stock Split Means for Shareholders

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Apple Inc. announced a 7-for-1 stock split on Wednesday, and the question many shareholders have is, "What does this mean to me?" I have two answers for you. The first one is simple: "Nothing." It means nothing because your value will not be affected. The longer answer, however, is more nuanced, so let's look at what's what.

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The stock split affects shareholders of record on June 2nd. So if you own a share of $AAPL on June 2nd, on June 3rd you'll own 7 shares, each of which has 1/7th the value of the pre-split stock. Trading on the split stock will begin on June 9th.

To put some numbers on that, $AAPL is trading at US$567.41, up $42.66 (+8.13 percent), on very heavy volume. After the split, an $AAPL shareholder would have seven shares, each with a value of $81.06.

Apple also announced that it was increasing its quarterly dividend for shareholders to $3.29 per share. After the split, each share will earn a dividend of $0.47.

Shareholders will have more shares, but they will add up to exactly the same value that they would have had before the split. Shareholders will also be getting dividends on seven times more shares, but those dividends will add up to precisely the same amount of money.

BUT...MOAR!

The notion that a stock split doesn't mean anything is difficult for some folks to accept. Surely having seven shares is way better than having one? Psychologically, the answer will be "Yes" for most people, but math seldom cares about psychology, and a stock split is one of those things where math wins.

For instance, a lot of folks have visions of how much more money they would have when they have seven times as many shares and the stock rises $40, like it did on Thursday. Instead of having $40 more, you'd have $280 more, right? The answer is no, no, no, and no again.

Any news that would move Apple's stock $40 pre-split would move Apple's stock $5.71 post-split. If Apple's stock rose $40 post-split, it would have risen $280 pre-split.

I emphasize this because I saw it as a bullet point in another wise sound writeup of the effect of stock splits on another site. For the last two or three years, we've been quite used to seeing $AAPL advance or retreat up to several dollars a day, but that won't be the case once the stock splits. Normal daily volatility will be in tens of cents, not a few dollars.

But You Said "Long Overdue"

Yes, I did say this stock split was "long overdue," and that's because while stock splits don't change a shareholder's equity or value, they do have a positive impact on a company's longterm stock price.

That's because of our old friend psychology. A stock with a share price of $50 or $80 is more attractive to retail investors, particularly small retail investors, because they can buy more shares when they invest.

Institutional investors don't care if they're getting a hundred thousand shares or a thousand shares when they plunk down $5 million on a buy. They understand that the number of shares they get doesn't affect the value of their investment.

But a retail investor with, say, $1,100 to invest, could get two shares of $AAPL today. With Apple's 7-for-1 split, that same investor could get 13 shares and have money left over. While there is no difference when it comes to the math, it does have a psychological effect, and that's why CEO Tim Cook said that the stock split would open $AAPL up to more retail investors.

If you want an example of this writ large, look at Warren Buffet's company, Berkshire Hathaway. Do you want to invest in Berkshire Hathaway? As of this writing, BRK-A, the company's common stock, is trading at $190,365.00 per share, down $435, on volume of 128 shares trading hands.

128 shares.

That stock became the playground of institutions and the super rich long, long ago.

Apple's Stock Splits

In the Second Steve Jobs Era™, there were two stock splits. The first was in 2000, and the second was 2005. Since 2005, the stock rose more than twelve fold, but we didn't get another split. I'm not sure why, but the reality is that the 7-for-1 split announced on Wednesday is a long overdue correction.

It not only puts the stock in the range of more retail investors, it also is more accessible to Apple's own employees, especially its retail employees and other employees making less than engineer, designer, operations, and legal wages.

Those employees will now have many more opportunities to directly participate in Apple's employee stock option plans as they won't have to wait as long to accumulate enough to buy a few shares here and there. That's good for morale within Apple Inc. and it democratizes the opportunity represented by the company's incredible success.

All things being equal, these small factors will add up to higher stock price in the future. Retail investors are a small part of the stock market, but they do have an effect on a stock's price. This may be especially so for Apple, a company for whom so many investors are also fans.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

Comments

aardman

If the stock split allows smaller players to play with AAPL, I expect any real effects it would have would be along the lines of greater volatility for AAPL shares.

skipaq

The problem with pure math dictating an equal value pre and post split is not using other important factors. A small factor is Apple’s increase in share buy back. A larger factor is the one Bryan mentioned: the lower share price should make the stock attractive to more investors than the $500 plus price. Like anything else a stock’s price will be impacted by supply and demand. It is difficult to factor how much that will be. That has a lot to do with psychology because the retail investor does’t think like the large investor or institutional investors.

aardman

@skipaq Yes a lower share price might make it easier for smaller investors to get into AAPL, but if they can get in, they can also get out.  So if you have more investors churning the AAPL bowl, the effect will not be so much on the (average stock price levels) but on its volatility.

Hagen

Typo in the paragraph at the end of the second section:
“I saw it as a bullet point in another wise sound writeup”
should be
“I saw it as a bullet point in an otherwise sound writeup”

MacFrogger

At >$500/share, AAPL would never be considered for inclusion in the Dow Jones Industrial Average because the average is price-weighted.  This despite the fact that AAPL is the most valuable company in the world.

Splitting the stock 7/1 brings the price down enough that the inclusion of APPL as a Dow stock is all but guaranteed.  Since many mutual funds, pension funds and other institutional investors will ONLY buy stocks in the DJIA, this move will also open up AAPL to significantly more institutional investment.  Its not just something that makes the stock more attractive to the small investor, it also makes AAPL more attractive to certain classes of institutional investors.

Peggy Li

Everything has been going up in the past 2 years except Apple. It’s the only value in the US.  Now that it’s more easily accessible to poor people (like myself), I think the stock price should EXPLODE.  Not to mention… It’s about time!

Like I said, this will also bring in new investors. (Like me!)

I’m poor. I’m still using my iPhone 4 cause I can’t justify/afford buying a new one. I live off rice/beans/ramen. I drive an old beater. I roll into the gas station on fumes. I have the absolute cheapest, bare minimum crappiest insurance policy I could find ($23/month from 4AutoInsuranceQuote.. woohoo!)… and that’s only cause it’s required by law! In fact, my friends always give me their second hand, unwanted stuff cause they know I’d take it and use it!

Am I happy that I can finally afford to buy some Apple stock? you betcha’! I’m gonna do my best to buy a share or two every month.  Before the split, this was not possible for me.

MacFrogger

Peggy: Just be careful you don’t blow a lot of money on brokerage fees!

Terrin

But a stock split does likely mean something mathematically.  After the split was announced, shares shot up 8 percent. So, when the split happens that value of the stock that will be split will likely be higher as a result of the split.

wab95

Bryan:

A very cogent explanation. I think the key concept in your explanation is your first point; for your average retail investor, this means nothing. Directly. As aardman points out, it could reduce volatility.

Overall, the move appears to have pleased the Street.

Polimon

I disagree with the author on the subject of pure math dictating the increments by which the stock rises post split. I think psychology is at play here as well, and we will still see increments in dollar amounts, not dimes. This split is going to make the stock roar.

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