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.
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.
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.
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.