Why Apple, Inc decided to split its stock 7-1
After announcing its 7-1 stock split, Apple also outlined why it did so, answering in advance the oft-raised question with a simple answer: "We want Apple stock to be more accessible to a larger number of investors."
Apple didn't frame its statement to suggest a specific type of investor it was hoping to make its stock "more accessible to," but there are a couple reasons why a split would attract different types of buyers.
Research by Morgan Stanley analyst Katy Huberty from February indicated that the proportion of institutional ownership in Apple is at a five year low.
As a trend, that suggests that Apple's rapidly rising stock price may have been a problem for institutional investors. The advantage of attracting institutional buyers (beyond the value of having buyers at all) is that they are seen as having an attractive influence.
Many funds effectively market themselves and their stock picks as something others should emulate, out of their own self interest because advertising their holdings can attract new buyers who will help drive up the prices of the securities it holds.
The idea that Apple might be interested in individual investors is reflected in the wording of the very simple example it presented to explain that the stock split doesn't change the actual value of an investor's overall holdings.
"Let's assume that as of the Record Date (June 2, 2014) an investor owns 100 shares of Apple common stock and that the market price of Apple stock is $490 per share, so that the investment in Apple is worth $49,000," Apple stated on the subject.
"Let's also assume that Apple's stock price doesn't move up or down between the Record Date and the time the split actually takes place.
"Immediately after the split, the investor would own 700 shares of Apple stock, but the market price would be $70 per share instead of $490 per share. The investor's total investment value in Apple would remain the same at $49,000 until the stock price moves up or down."
A split does offer more future flexibility in selling a fraction of one's holdings, the same way having quarters rather than a dollar coin allows a person to only pay for a short period when parking at a meter. As Apple's shares head upward, having to sell $600 to $1000 of stock at once might be less flexible than a small investor would like.
After a two year period of irrational stock moves, Apple may likely want to erase the mental barriers investors may have about where Apple trades, as well as breaking any psychological links between Apple's share price and that of other companies one might compare it against.
Dividing the stock price by 7 results in an entirely new set of numbers that aren't easy to mentally translate in comparisons with past expectations. This is similar to how a tourist--in a country where the local currency is an unfamiliar fraction of the value of the currency his expectations are set in--now looks at prices in a new way.
The seven way split certainly explains why Apple chose an odd number for its new dividend: $3.29 is Apple's first dividend to be evenly divisible by seven, resulting in 47 cents.
The psychological barrier of $700, the price Apple hit in late 2012 before a series of drops that reached below $400, resonates in the minds of many current and former Apple shareholders. Splitting by 7 turns that memorable number into $100, which doesn't seem particularly difficult to attain at all, simply because it sheds the trappings of historical context.
Google's split does not appear to have been an attempt to court new investors, because it wasn't just a 2-1 split. It was a "dividend" adjustment, where Google took its $1100 stock back and gave its existing shareholders two shares valued at half the price each.
What makes Google's move unlike a standard split is that one of the shares has no voting rights. Google's split was designed to silence shareholder input by taking away their rights in exchange for nothing. The move also created two different, independently valued classes of Google stock trading under different ticker symbols: GOOG and GOOGL.
With a 7-1 split, Apple's share price at Monday's close would be $84.87, a figure that is harder to compare against Google's price than the current "half of double of Apple at its peak."
Apple's stock hasn't been around $80 since the opening of the iOS App Store in 2008, back in the days when investors were driving Apple's stock up and down between $180 and $80 as everyone shared their doubts about the new iPhone and its iTunes App Store.
Psychologically, that resets the 2014 Apple stock clock to point where investors can imagine another four year long appreciation in value, without being distracted by the last two years' reminder of a bandwagon of investment in Google as investors scurried away from Apple's profitability to instead fund Google's breathtakingly expensive $12.5 billion acquisition in Motorola Mobility, cover all of its subsequent billions in operational losses, and take on accountability for Samsung's patent infringement via a secret indemnification agreement that even Samsung didn't want anyone to know about.
Apple didn't frame its statement to suggest a specific type of investor it was hoping to make its stock "more accessible to," but there are a couple reasons why a split would attract different types of buyers.
Institutional investors
Institutional buyers, including mutual funds and other banking institutions, may have rules related to the maximum price of the shares they hold. By splitting its stock into a fraction that causes the share price to align with the rules of a greater swath of these buyers, Apple increases the number of potential buyers.Research by Morgan Stanley analyst Katy Huberty from February indicated that the proportion of institutional ownership in Apple is at a five year low.
As a trend, that suggests that Apple's rapidly rising stock price may have been a problem for institutional investors. The advantage of attracting institutional buyers (beyond the value of having buyers at all) is that they are seen as having an attractive influence.
Many funds effectively market themselves and their stock picks as something others should emulate, out of their own self interest because advertising their holdings can attract new buyers who will help drive up the prices of the securities it holds.
Individual investors
For individual investors, the psychology of a lower per-share price and greater number of shares might simply feel like a better deal, although, of course, the split has no direct impact on value.The idea that Apple might be interested in individual investors is reflected in the wording of the very simple example it presented to explain that the stock split doesn't change the actual value of an investor's overall holdings.
"Let's assume that as of the Record Date (June 2, 2014) an investor owns 100 shares of Apple common stock and that the market price of Apple stock is $490 per share, so that the investment in Apple is worth $49,000," Apple stated on the subject.
"Let's also assume that Apple's stock price doesn't move up or down between the Record Date and the time the split actually takes place.
"Immediately after the split, the investor would own 700 shares of Apple stock, but the market price would be $70 per share instead of $490 per share. The investor's total investment value in Apple would remain the same at $49,000 until the stock price moves up or down."
A split does offer more future flexibility in selling a fraction of one's holdings, the same way having quarters rather than a dollar coin allows a person to only pay for a short period when parking at a meter. As Apple's shares head upward, having to sell $600 to $1000 of stock at once might be less flexible than a small investor would like.
A fresh start
In the past, Apple has split its shares 2-1, first in 1987, then again in 2000 and 2005. The more typical 2-1 split cuts the price neatly in half, which is really easy math. Splitting by 7 is a less familiar transformation, which may have been intentionally selected to reset the market's expectations of where Apple "should" be trading.After a two year period of irrational stock moves, Apple may likely want to erase the mental barriers investors may have about where Apple trades, as well as breaking any psychological links between Apple's share price and that of other companies one might compare it against.
Dividing the stock price by 7 results in an entirely new set of numbers that aren't easy to mentally translate in comparisons with past expectations. This is similar to how a tourist--in a country where the local currency is an unfamiliar fraction of the value of the currency his expectations are set in--now looks at prices in a new way.
The seven way split certainly explains why Apple chose an odd number for its new dividend: $3.29 is Apple's first dividend to be evenly divisible by seven, resulting in 47 cents.
The psychological barrier of $700, the price Apple hit in late 2012 before a series of drops that reached below $400, resonates in the minds of many current and former Apple shareholders. Splitting by 7 turns that memorable number into $100, which doesn't seem particularly difficult to attain at all, simply because it sheds the trappings of historical context.
Erasing Google comparisons
In particular, Apple reached $700 around the same time Google did. However, as Apple's stock has tumbled into oblivion in 2013, Google's has blown into the stratosphere, reaching above $1100 before Google itself performed a split of sorts.Google's split does not appear to have been an attempt to court new investors, because it wasn't just a 2-1 split. It was a "dividend" adjustment, where Google took its $1100 stock back and gave its existing shareholders two shares valued at half the price each.
What makes Google's move unlike a standard split is that one of the shares has no voting rights. Google's split was designed to silence shareholder input by taking away their rights in exchange for nothing. The move also created two different, independently valued classes of Google stock trading under different ticker symbols: GOOG and GOOGL.
With a 7-1 split, Apple's share price at Monday's close would be $84.87, a figure that is harder to compare against Google's price than the current "half of double of Apple at its peak."
Apple's stock hasn't been around $80 since the opening of the iOS App Store in 2008, back in the days when investors were driving Apple's stock up and down between $180 and $80 as everyone shared their doubts about the new iPhone and its iTunes App Store.
Psychologically, that resets the 2014 Apple stock clock to point where investors can imagine another four year long appreciation in value, without being distracted by the last two years' reminder of a bandwagon of investment in Google as investors scurried away from Apple's profitability to instead fund Google's breathtakingly expensive $12.5 billion acquisition in Motorola Mobility, cover all of its subsequent billions in operational losses, and take on accountability for Samsung's patent infringement via a secret indemnification agreement that even Samsung didn't want anyone to know about.
Comments
Cha-CHING!!!
Anything Apple can do to avoid comparisons with Google, Samsung and Amazon will be welcome as all three of those bubbles are set to pop or at least deflate.
Apple alone of the big tech stocks has the fundamentals for a prolonged rise.
For me the best thing about the 7to1 is the way it will encourage investors to consider Apple's actual value rather than the emotions and bias now associated with the magic number of 700.
Even if investors aren't superstitious themselves, they still make calculated decisions based on other peoples' perceived irrationality.
Excellent article.
I'd like to add this will hopefully decrease option activity that has also keep the stock price down. Now you will need to pay 700% more fees to execute a $50k option contract. Options are sold by 100 share lots.
Good point about selling shares in smaller increments also. Never thought about that.
I don't trade options, but I believe that there is mini options for AAPL that has existed for a awhile now. Mini options are 10 share lots.
Of course, the lower the share price the more investors there can be so the stock could become more volatile but in this day and age with such easy and cheap trades I think this adds to the volatility the way an electron adds to the weight of an atom.
Since my AAPL stock is within an IRA and my dividends are reinvested, it will make it easier to get full shares instead of fraction of shares. In some people's minds (mine included when I'm not thinking), having more shares looks better than fewer shares even though those fewer shares were worth more money. I've always hated to see AAPL drop by large numbers even though the percentage drop wasn't always that much. I'll need to reset my mental calculator in June when AAPL moves by a few points, which would be several points now.
I've always hated getting $100 bills through an ATM since it's much easier to spend the whole thing. I'd rather get $20's and be able to show some restraint. :-)
1) fractional sell-offs for those who have 20 (140) or less shares
2) the cost of Options goes up, ROI on Options based speculation [and the need to feed it] goes down (sog35... good point)
3) less institutional investing, more personal investing
- primarily because of the lower cost of entry for a std purchase (100 shares)
- but also individuals look at the stock price, and less Price/Earning or forward earnings estimates, when they determine if a stock is 'overpriced'.
4) Apple can be both and growth and an income stock
Dow inclusion is a plus minus now that I've learned about it. Being in the Dow can cause some back pressure on growth potential (already dampened by being the largest market cap), but also can cut panic selloffs (less selling on lows, as dow indexes will limit sell offs).
Given the combination of a split and continued borrowing for stock buy back, you're getting a serious message. we want smaller investors (including our employees) to own a greater percentage of the company. We'll suffer the day traders, and short sellers, but now their costs are 7X more for aggressive bets, and the Icahns of the world have a greater proxy fight.
$100 easy target - everyone happy back to $700. There is no comparison with Google - this eliminates stupid price per share comparison -
Cook is taking time to make the correct product - and it will be released by September. Google just buys loser companies .. and blows billions since they are clueless (a/k/a Motorola, now Nest fiasco) - they are a "1 trick pony" that will lose out if Apple elects to do its own default search (safari) with itself or someone like Yahoo.
What you see is only the result of Cook's brilliance in planning and timing. Google and Samsung are hopeless puppets of a master CEO and his Team (including Ives)
I'm still steamed about Google's stock split. Google is run by a bunch of crooks who just stole value from any shareholder who is not a bastard named Page, Brin or Schmidt.
I'm not following. The split doesn't change the value in and of itself, and if the stock drops for common shareholders it also drops for Page, Brin and Schmidt.
I really liked your article Daniel!
It was nice that you mentioned the "fresh start" effect, I couldn't agree more!
All good reasons that you listed there Mr. Dilger but I think the more reasonable explanation why Apple chose the 7-1 split is because of iOS 7.1... they go better together.
Since my AAPL stock is within an IRA and my dividends are reinvested, it will make it easier to get full shares instead of fraction of shares. In some people's minds (mine included when I'm not thinking), having more shares looks better than fewer shares even though those fewer shares were worth more money. I've always hated to see AAPL drop by large numbers even though the percentage drop wasn't always that much. I'll need to reset my mental calculator in June when AAPL moves by a few points, which would be several points now.
I've always hated getting $100 bills through an ATM since it's much easier to spend the whole thing. I'd rather get $20's and be able to show some restraint. :-)
I hope your AAPL is in a Roth IRA.
Quote of the day!!
I'm not following. The split doesn't change the value in and of itself, and if the stock drops for common shareholders it also drops for Page, Brin and Schmidt.
Messrs Page, Brin and Schmidt exempted themselves. The stock split strengthened their voting power even more.
I'm not following. The split doesn't change the value in and of itself, and if the stock drops for common shareholders it also drops for Page, Brin and Schmidt.
Maybe he's referring to how Google issued a different class of shares. I don't really follow GOOG all that much, but I remember reading something about that. In addition to GOOG, there's also something called GOOGL I noticed.
I'm still steamed about Google's stock split. Google is run by a bunch of crooks who just stole value from any shareholder who is not a bastard named Page, Brin or Schmidt.
That why I don't invest in Google.
Even if you owned all of the shares of the Class A stock, your vote wouldn't matter because Google insiders have Class B stock with 10x the voting power.
Maybe he's referring to how Google issued a different class of shares. I don't really follow GOOG all that much, but I remember reading something about that. In addition to GOOG, there's also something called GOOGL I noticed.
GOOG - Class C - No Vote
GOOGL - Class A - 1 vote/share
No Symbol - Class B - 10 votes/share (reserved for Google insiders only)
Google "split" the stock so they could issue Class C shares without diluting their voting percentage.
This move also makes Apple a shoo-in for the Dow.
The DJIA values companies based simply on share price, and Apple's high per share price meant including it in the Dow would give way too much weight to Apple.
With the lower share price, Apple will almost certainly be the next company included in the Dow, and therefore see its share price rise even further as index funds have to buy AAPL (although the share price may not change since this expectation may already have been baked into the price rise which happened since the 7-1 split was announced).
I think 1 aspect of this split a lot of people are ignoring is that this makes the Apple stock available to the vanity "investor".
This may be someone who isn't really into investing, but is an Apple fan, and would like to "own" a piece of Apple. It's far easier to do that if you have to pay only $70 instead of $500.
Now, this may not affect AAPL's price at all, but what it does is strengthens the loyalty of the customer. Such purchases won't help Apple on the financial side, but will help them on the customer retention, and word of mouth advertising sides, as this person is far more invested in the company (pun intended) than if he only purchased the products and did not have that single stock.