You are here: Home → Forum Home → The Mac Observer Forums → Apple Finance Board → Thread
Why a split is no longer out of the question
-
We all (I hope) understand that a split is economically meaningless; a five-for-one split is the equivalent of getting five nickles for a quarter.
HOWEVER: a split can be a powerful psychological booster, and signal Apple’s desire to have a wider public shareholder base. Small investors like to invest in “round lots” of 100 and $42,000 is prohibitively expensive for some.
BUT THERE MAY BE AN EVEN MORE IMPORTANT CATALYST FOR A SPLIT—A SPLIT TO FACILITATE AAPL’s INCLUSION IN THE DJIA.
As the below WSJ blog post explains, Dow Jones would not consider adding AAPL to the Dow at its current high price. And yet what other company is a better proxy for the mobile internet, the most dynamic sector of the US economy?
I suppose they COULD add Qualcomm to the Dow (swapping out Intel), but the Dow is really supposed to be about the bluest of the blue chips.
Imagine a phone call between Rupert Murdoch (whose News Corp now owns Dow Jones) and SJ or TC.
Rupert: “We REALLY want AAPL in the Dow. Having CSCO and MSFT in it, but not AAPL, is making us a laughingstock. New Corp. will put all our print and video content on the iPAD. We’ll disagregate all Fox content for iTunes store. One tiny condition: a five for one stock split.”
Remember, too, the TC’s compensation is now welded to the stock price.
What is the downside, other than perhaps bragging rights for the highest price stock (a meaningless measure, since they’ve already achieved bragging rights for largest market cap).
Unlikely? Yes.
Out of the question? Hardly.
Desirable? You decide.
Here is the blog that explains why a split is the only way to get AAPL into the Dow.
By Mark Gongloff
APNow that it?s the biggest company in America, you might think it would make sense for Apple to be added to the Dow Jones Industrial Average. But it may have to stand alone.
The stated purpose of the DJIA ? a joint venture of CME Group and Dow Jones, which employs this blogger ? is ?to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy.?
It sure seems like the biggest public company in the US, pumping products into the hands of consumers across America, would be a key part of such an index, but there?s a major problem with adding Apple: Its stock price is just way too high.
At $420 and climbing, it would be the highest-priced stock in the index, with IBM a distant second at $176.
Bloomberg Businessweek?s Roben Farzad explained the problem with this back in July (ignore the share-price references, all of which are obviously different today):
The answer lies in the peculiar way the Dow index is calculated. Most benchmarks, including the Standard & Poor?s 500-stock index, weight their components by market value, which is the share price times the number of shares outstanding.
The Dow uses only one component of that equation: stock price. Thus IBM?holds the top weighting in the Dow, 10 percent, even though it is only third by market value. Meanwhile, because General Electric, Alcoa, and Bank of America trade in the teens, they represent a combined 3 percent of the Dow ? less than a third of IBM?s weight.
Such distortions, says Jeffrey Yale Rubin, director of research for Birinyi Associates, are why ?investors should realize that the Dow is just a subset of the entire market?not the entire market.?
With a share price of about $330, Apple would dominate the Dow, accounting for more than 17 percent of the index. A 1 percent change in Apple?s stock price would translate to a 23-point change in the Dow. That kind of outsize impact, says Rubin, ?would pretty much make the Dow irrelevant. I agree: Apple should be in there. But at this price, you can?t just put it in.? The keepers of the Dow acknowledge the problem. ?Apple, at its current price level, would distort the Dow,? says Prestbo.
Apple could split its stock to make it a better Dow fit, but there?s really not much incentive for it to do so. With few funds following the Dow, it?s not as if joining the DJIA would force a lot of fund managers to buy Apple stock. They probably already own quite a lot of it.
Signature
One trillion or bust
-
What is in it for Apple management and investors?
Signature
Stay Hungry. Stay Foolish. - Steve Jobs
-
Management and current investors: higher stock price; prestigious imprimateur of the Dow.
Future stock investors: ability to buy a “round lot.”
I agree this is mostly psychological. But what is the downside?
Signature
One trillion or bust
-
Management and current investors: higher stock price; prestigious imprimateur of the Dow.
Future stock investors: ability to buy a “round lot.”
I agree this is mostly psychological. But what is the downside?
The consensus was it is better not to be included in any indices as it causes volatility and encourages stock price manipulation by hedge funds. Newer AFBers may have differing views.
Signature
Stay Hungry. Stay Foolish. - Steve Jobs
-
No DOW, thank you very much. AAPL’s doing fine without it.
AAPL isn’t “old money” even if it is a kinda old tech company. The World’s Largest Startup? is better listed in the NASDAQ (though yes, it is in the bigger S&P 500 too).
Speaking of the NASDAQ, let me know the next time they think about rebalancing AAPL.
Signature
The Summer of AAPL is here. Enjoy it (responsibly) while it lasts.
AFB Night Owl Team™
Thanks, Steve. -
Management and current investors: higher stock price; prestigious imprimateur of the Dow.
Future stock investors: ability to buy a “round lot.”
I agree this is mostly psychological. But what is the downside?
Yeah, that worked out great for Microsoft investors. Show me a growth stock in the Dow 30.
Be careful what you wish for WRT Dow inclusion.
Signature
We filed for over 200 patents for all the inventions in iPhone and we intend to protect them. — Steve Jobs, 2007
-
The Dow Jones could be converted to a S&P style. Weight the parts appropriately, throw in fudge factors to account for todays value, either of the DJ as a whole or for the individual parts.
It is sort of a red herring issue.
The real problem is not the math.
[ Edited: 21 September 2011 11:34 AM by Tetrachloride ] -
JT -
I wasn’t advocating for it, or wishing for it.I was hypothesizing that the DOW, which pretends to be a proxy for US industry, might want to have some representation from the vital mobile device industry.
I also suspect the investment implications could be bullish (at least in the short term) and worth discussing. But the point about MSFT and CSCO and HP is very well taken.
Apple stock will do what Apple stock will do; over time, it will track the company’s fundamentals.
The somewhat related question, which would have a much bigger impact IMHO, is a potential (small) dividend or buyback.
While conventional wisdom is that such measures are tantamount to throwing in the towel on growth, my belief is that Apple has challenged the conventional wisdom so frequently that it could do so in this case too.
The press release quote could even be: “This is not meant to signal any diminuition of our expectations for future growth; rather it is to return a very small part of our excess cash to loyal shareholders, and to expand our shareholder base.”
Remember: it is a desirable thing to have an expanded shareholder base, and many institutions or funds aren’t allowed to invest in APPL due to lack of dividend.
Do the math: $1 a quarter per current share is would cost less than $1 billion, when cash is growing at a rate of $10 b per qrtr, and cash generation is accelerating.
They surely don’t need ALL that cash to speed up production ramp….
Again, far be it from me to second guess our all-star team in Cupertino; what i’m trying to do is stimulate a conversation and,
perhaps, to challenge conventional wisdom.I recognize that many of you old timers may have settled all of these questions in your own minds a long time ago. Please humor this naive newbie (because you’re going to be seeing a lot more of us!).
Grateful for your insights and good luck all,
[ Edited: 20 September 2011 03:41 PM by Xtra ]
XSignature
One trillion or bust
-
Is Apple Really Ready to Make Move to the Dow?
Then there?s the disadvantage to Apple.
After all, tech stocks hardly have a glittering history when added to the Dow.
Intel and Microsoft made the move in 1999 and saw respective price declines of 41 and 34 percent since then, and Cisco joined the bluechips in 2009 and fell 17 percent.
?When they put these tech stocks in the Dow it?s the kiss of death,? says Dave Rovelli, managing director of US equity trading for Cannacord Adams. ?Every time a tech stock goes into the Dow it goes down.?
Signature
We filed for over 200 patents for all the inventions in iPhone and we intend to protect them. — Steve Jobs, 2007
-
JD
Thnx for the link, which you quoted selectively.
Same article includes this:
?From a standpoint for Apple, it?s great for shareholders, it?s tremendous for the Dow 30, the ripple effects would be tremendous. So let?s bring it on,? says Todd Schoenberger, managing director at LandColt trading in Loews, Del. ?This is long overdue. Apple should have been added years ago.?
[ Edited: 21 September 2011 12:50 AM by Xtra ]
In any case, since when did WS analysts become the oracle?Signature
One trillion or bust
-
I think all this talk of split is only talk. One person on TV has a view and everyone thinks aapl will split.
As much as I would welcome it, I don’t see it.
SJ made it clear many years ago that Apple does not control the price of the stock and only the markets control it.
A split for whatever reason will be done simply to address some perceived issue with its price.
I have said this before. It has been confirmed to me by an employee who has met SJ many times. He indicated that SJ wants aapl to beat goog in price per share before issuing a split. When he was asked why aapl won’t split the price in order to increase value, he answered that it seems to be working good for goog. This was at an investor forum back in 2007.
SJ is very emotional when it come to competition. He is determined to make a point and will wait 20 years to make it. He will cancel a contract in a flash with a supplier if they spill the beans. He may not be the CEO but as chair of the board who has to approve a split he is not in favor of it.
I don’t see a split for another 3 years. In the mean time I save every dime to buy every share I can afford, because when it splits it will almost triple in price 24 months later.
Just see what the stock did in 2005 after it split.
-
SJ made it clear many years ago that Apple does not control the price of the stock and only the markets control it.
How about a reverse split then? :-D
Actually, I tend to think it’s nothing more than what your Apple friends suggests—beat GOOG on its own power (from EPS growth). After that, we split.
One would think market capitalization would be enough for bragging rights, if that’s what it comes down. Tim Cook isn’t likely to alter course now, in any event. I don’t think we split.
-
Of course, a stock split doesn’t operate in a vacuum. Lots of stuff happened to Apple between 2005 and the go-go days of 2007.
SJ may be “emotional” but he won’t let emotions get in the way. And as for AAPL being expensive? Pfft, exactly - look at GOOG. Or other equities trading at “big number” prices. Did you know Chipotle Mexican Grill is trading in the 300s? Did you even remember it was a publicly traded company?!
It’s OK. Notions of “expensive” or high market cap probably do have dampening influences on AAPL…but the tradeoff is a super-cheap valuation and a quite a bit of coiled spring potential. And when there’s less-than-perfect market information…that’s where the AAPL-watching crowd at AFB and elsewhere move in and seize the opportunity!
Signature
The Summer of AAPL is here. Enjoy it (responsibly) while it lasts.
AFB Night Owl Team™
Thanks, Steve. -
No way Apple splits just to accomodate a f’d up non-weighted index. These stories are only being written due to the change in mgmt, but it’s just not realistic. Steve would tell Rupert to fix his index.
-
Just for the record, I’d be thrilled with a split - if I could be assured somehow that Apple would not enter the Dow 30. Otherwise, it would be a short term fool’s gold.
Signature
We filed for over 200 patents for all the inventions in iPhone and we intend to protect them. — Steve Jobs, 2007
-
No way Apple splits just to accomodate a f’d up non-weighted index. These stories are only being written due to the change in mgmt, but it’s just not realistic. Steve would tell Rupert to fix his index.
Now that is the SJ we know and love…. And Rupert probably would.Signature
One trillion or bust
