Splitting the Apple: Will Its Stock Ever Be Affordable Again?
Leave it to Google (GOOG) to steal Apple's (AAPL) thunder.
Amid all the recent speculation about whether Apple would split its increasingly pricey shares -- now topping $600 a share -- it's Google grabbing the spotlight and announcing last Thursday an effective stock split of its own.
Google? Yes, Google. Not Apple. Apple CEO Tim Cook has signaled that there is "very little support" from the company's board to split the stock. But people are clearly interested in one, and Google's action might put more pressure on Apple to consider a share split of its own.
So let's see what a split means for investors and whether it might make sense even if Apple's not considering one today.
Splitting 101
When a company splits shares, it reduces the value per share but gives shareholders a proportional level of extra shares. Simply put, in a 5-to-1 stock split, a $100 company would now trade at a $20 per share price, but you'd now own five shares for every one you used to hold.
On a practical level, there has been no change in value. So why bother splitting?
Proponents point to the added "liquidity" of the stock, saying it's easier to come up with the cash to purchase a $100 stock than a $10,000 one.
Behavioral studies have shown that investors prefer stocks well below the $100-per-share range and that companies that split outperform the market both in the short range after splitting and over the long run.
Finally, we come to options. A stock that's expensive on a per-share basis can be expensive to execute options strategies on. If Apple sits at $600 per share, that means an option represents $60,000 in stock!
Looking at Liquidity
First, let's address the liquidity issue. Comparing Apple with many of its large-tech peers that trade at far lower share prices, we find that Apple apparently isn't affected by its higher share price.
Company Name | Average Shares Traded | Average Value Traded | Percent Market Cap |
Apple | 21.1 million | $12.9 billion | 2.1% |
Microsoft (MSFT) | 49.9 million | $1.6 billion | 0.6% |
Cisco (CSCO) | 42.6 million | $852 million | 0.8% |
2.6 million | $1.7 billion | 0.8% | |
Intel (INTC) | 40.3 million | $1.1 billion | 0.8% |
Average value traded is at Friday's prices. Percent market cap traded is at Friday's market cap.
What these results show is that even after accounting for Apple's 45% rise over the past three months (and other tech peers seeing their own jumps in this time as well), a significantly higher value of Apple's shares trade every day. On April 10 alone, nearly $20 billion worth of Apple stock was traded!
Google's trading volume is on par with other tech peers. And then there's Priceline.com (PCLN), which sits at $738 per share, higher than both Apple and Google. Priceline sees 2% of its market cap traded each day. That's a number higher than every other tech company aside from -- you guessed it -- Apple.
The conclusion: Tech companies with higher share prices appear to have even more trading and liquidity than their low-priced peers do.
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What Happens If Apple Never Splits?
Given Apple's share price, a natural follow-up question to the split issue is: Could Apple be the next Berkshire Hathaway (BRK-A)(BRK-B) and refuse to split shares even as they hit obscenely high levels?
Class "A" shares of Berkshire Hathaway, Warren Buffett's investment vehicle, have long been the priciest shares on the New York Stock Exchange. Today, they trade for about $120,000 apiece. The company did eventually create a "B" class of shares, but even those soared past $3,200 before a recent split was enacted to accommodate Buffett's purchase of Burlington Northern.
While Apple could definitely see its per-share price continue to rise, by $2,776 per share it'd pass the current value of the entire technology sector -- including Apple itself!
Here are the milestones Apple would pass on its way to passing Berkshire Hathaway's share price. In short, it's not going to happen.
Source: S&P Capital IQ. Saudi Aramco estimated at $3.8 trillion. GDP figures are for 2010. Assuming no splits, adjustments for returns of capital, or dilution. Figures based on March 23 close.
The best reason to split?
Of all the reasons to split, the one with the most tangible effect is something Berkshire Hathaway has had to contend with for years: In spite of its mammoth market cap, Berkshire has never been included in indices such as the S&P 500 (^GSPC) because of the difficulty rebalancing with its large share price.
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Apple, despite being the largest company in the world, isn't even in the Dow Jones Industrial Average (^DJI). That's in large part because of the Dow's wonky price-weighting methodology. Instead of weighting companies by their proportion of market cap as the S&P 500 does, the Dow weights on a "price divisor." One simple way to understand this is that IBM (IBM), a company whose shares are worth $204 each, is 12% of the Dow, while General Electric (GE), whose shares trade for $19 each, is just 1.1% of the index. Think about that for a minute: IBM is worth just 20% more than GE, but it affects the Dow nearly 11 times more!
The Dow's methodology is a problem for Apple at its current prices. As Bespoke Investment Group noted last September, if included in the Dow without a split, Apple would constitute 22% of the Index. Since then, Apple has soared, so that imbalance has only increased.
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What's an Apple Fan to Do?
As Apple becomes larger and larger, another common question is: "At prices like this, who's left to buy its shares?"
Apple already fixed a part of this question by paying out a dividend. The company can now be purchased by dividend-focused funds that control a sizeable amount of assets. And the big institutions that are buying large lots of Apple aren't affected by its share price.
Still, that leaves the rest of us. It can be frustrating for individual investors that buying a single share of Apple means shelling out $600. Yet fear not if the high price of each Apple share is turning you away: We've compiled a list of 3 Hidden Winners Inside the iPhone and iPad that all trade at low enough share prices that any kind of investor could add to a portfolio. You can grab free a copy today.
Motley Fool analyst Eric Bleeker owns shares of Cisco and Berkshire Hathaway. The Motley Fool owns shares of Google, Berkshire Hathaway, Intel, Cisco Systems, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, Apple, Berkshire Hathaway, Microsoft, priceline.com, and Intel, and creating a bull call spread position in Apple and Microsoft.
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