Apple's 7 for 1 stock split: What you need to know!

Apple's 7 for 1 stock split: What you need to know!

Alongside their Q2 2014 results, Apple announced a 7 for 1 stock split. In other words every share of AAPL will soon become 7 shares of AAPL. Whenever a big company announces a stock split lots of people talk about it as if it's some kind of big deal. It isn't really a big deal at all. Public companies like Apple have their shares traded on a stock exchange where average Joe buyers like you and me can buy and sell. Big money managers can do the same. The total number of shares in existence makes up the entire company. I often explain that it's like cutting a pizza.

If you cut a pizza in to a bunch of pieces. If you have all the pieces, then you have the whole pizza. But if you have one piece out of 10, you own 10% of the pizza. When a company splits its stock, it's just like cutting the pizza slices into smaller slices. If you owned 1% of all Apple shares yesterday you'd still own exactly 1% after the shares are divided into 7 pieces. Nothing changes.

So why split? In the long run it's about liquidity. An asset is "liquid" when it can be easily traded. Famous paintings are not very liquid compared to bank drafts, for example. A house in the suburbs is more liquid than a 20 million dollar mansion because it's generally easier to sell.

Because stocks tend to rise in value, if nobody ever split their shares we'd be looking at stock prices that were out of reach for most investors. Google went public at $85 per share. Anyone who could justify buying stocks could come up with $85 to buy a single share, should they have wanted to. But once the stock reached $1100+ there would be people who could not reach a single share. Some people save a bit of money on each pay check and perhaps invest no more than $500 at a time. Google would be out of reach.

Taken to the extreme, look at Berkshire Hathaway Class A shares, which have never been spit and cost about $191,000 each. I don't know too many people who can swing a single share.

So Apple is splitting its $560+ stock into something that will make it more like a $80 stock. If a $500 purchase was too much for you, I don't think you should buy individual stocks anyway. The commissions (say $9.99) would amount to 2% of your trade, meaning you lose 4% to buy and then sell. That's not smart.

But in time, if Apple didn't split its shares, they'd become more and more out of reach for the average investor just like Berkshire Hathaway. So they've done a split of 7:1, which I think is smart. Instead of splitting the stock 2:1 like most companies, and then having to do it again in a few years, they're getting it done all at once for perhaps the entire next generation of investors. If Apple returned 10% per year for the next 20 years then the stock would return to its pre-split price after that long period of time.

So I guess you could say Apple is doing this so it doesn't have to worry about it again for a long, long time. Or you could say that Apple feels very good that its stock price will continue to grow, meaning that a split would eventually become necessary, and they're taking care of the "problem" in advance.

That, in a nutshell, is why investors sometimes consider stock splits to be signals, by the management team, of confidence in the future. If that' the case with a 2:1 split, I think Apple's 7:1 split must signal a LOT of confidence. But I should also point out that it is quite common for management teams to have misplaced confidence. They are not always the best predictors of their own stock price (at least beyond the whort term ... just look at what happened to BlackBerry within a couple years of it's 3:1 stock split)

But let's not worry too much about all of this. At the end of the day Apple is still the same company with the same risks and opportunities. The valuation of the stock (what its worth vs. what you get) won't change after the split.

Don't spend too much time thinking about the split. If you believe in Apple, want to invest in individual stocks and can take a long term approach to investing, then you have at least 3 of the necessary criteria to buy shares. Always buy stock after doing your own due diligence, always understand the risks, and always take responsibility for your own decisions rather than blaming a loss on some analyst who wrote a report that you blindly trusted.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

Apple's 7 for 1 stock split: What you need to know!

18 Comments

Great analysis, Chris. I won't bother with re-posting my comments from your other post about the state of Apple. You explained the main point I was making… the small/average investor will now have an opportunity to buy into Apple at a lower price point.

I saw your other comments ... but if you have $3k to invest in a stock that is priced at $500 (or whatever), this is not a factor for you. It's like saying it would matter if you cut your 5 pieces of pizza into 35 pieces when you'd still be just as full after eating them. I'm assuming (??) you are just seeing more value (emotionally) in 35 shares because it seems like a more substantial investment?

Believe me, I walk the talk here. When I was younger I bought some positions where I held single digit numbers of shares. Once you realize it's about the dollars invested, not the shares owned, you are further ahead.

Correct me if I'm wrong, but if I have one stock for $700 that becomes 7, I have 7 $100 stocks. But the difference between the pizza here is in a few years, I can have 7 $500 stocks (likely less, but still), as I don't think the original stock could get to $4900 for one. Basically, for the same money, I get more room for profit, right?

Edited for clarity.

At the end of the day, the stock is related to the value of the company. Just because you spit a stock does not mean the value increases. Yes, you might have a few more people buying the stock if it is 80 instead of 560. But not enough people to impact the value of the company. At some point, people holding stock in a company that is over valued, will unload the stock (causing the price to drop)

Right. Causing it to drop in the short term. Basically, what I meant was, that a split is bad for day traders, but good for long term investors*. As it seems that your negatives were from a day trader pov.

*Assuming the price goes up over time, not down.

not really. a split can increase people coming into a stock at low prices making it a bit more volatile and a day trader can feed off the volatility. Stocks like Berkshire don't split in part to not have to ever deal with that sort of volatility. plus a day trader isn't gonna care if it goes down, they can play both directions.

Splits are pracically meaningless from a financial and trading standpoint for everybody except those who are unable to even buy a single share before the split. The only relevance I attach to splits is the signal they send about a management's teams feelings about the future.

Hi there ... please consider yourself corrected :)

Stock price, alone, does not get in the way of upside. Look at Berkshire Hathaway. When the stock traded for $10,000 people who thought it couldn't get to $100,000 were wrong. Stock price alone is a meaningless number.

I agree to a certain extent, Chris. But I think it comes down to the "liquidity" point that you made (using your Berkshire Hathaway reference as an extreme case in point). Right now, Apple is at $566/share. I would think that few companies have a per-share price in that range and higher. Although Apple can feasible continue to grow, the price per share will continue to increase, thus making it harder for the average Joe to join in the ownership. It also makes it harder for Apple to attract investors as the share price makes it more and more prohibitive. And Apple is not the type to company that tailors to the BH investing crowd, I would think.

By splitting the stock (and doing so 7:1) it allows an entry point for the average Joe to buy into a company that not only has an upside for growth, but also as a company that one believes in and wants to support by actually owning a tiny portion of it. If I have $500 in June I can own 5 share for Apple. Today, I can't even buy 1 share. And those 5 shares are more likely over time to increase in value from $80/share to whatever, whereas with it's current per share price of $566 it may reach a ceiling in value.

Investors (of all types) are also influenced to varying degrees by perceived value. It happened with Apple recently. Their stock price hit the $700 zone, then investors and analysts nitpicked until the price dropped under $500, even though the fundamentals of the company and it's growth and innovations were showing otherwise.

Google is in the same boat, and it's fundamentals are a bit more questionable than Apple's. I would not be surprised to see them (Google) do the same thing within the year (splitting their own stock at 3:1 or better).

the stock price is based on the value of the company. You're not gonna make any more money buying at say $700 for 1 share as if you would after a 7 for 1 split if you bought 7 $100 shares. And the stock isn't going to go any higher simply because the stock price is lower.

you're correct that a lower price simply allows people with less money to get into a stock. obviously if you only have $100 to invest you can buy one share vs not being able to afford a share at $700. But the value of your share at $100 is 1/7 the value of the share the day before it split from $700. What moves the stock i earnings and if the company made the needed earnings it would go up from $700 too. There is a reason Berkshire is as high as it is. If you don't split and you're still a good company you'll go up regardless of how high the share prices is. But yes it does make it harder to enter a stock.

But consider this. if you have 1 share at $700 and the company has say twice the earnings and thus the share price doubles to $1400. You made $700. Well imaging you have have 1 share at $700, then it splits 7 for 1 and you now have 7 shares worth $100. Now imagine the same hypothetcal, company does twice as good, earnings double, thus the share price doubles from $100 to $200. Well if you have 7 shares you still have shares with a value of $1400. You double your money in the exact same amount either way. From the investors standpoint he makes the same money either way.

And if you're the guy that can now buy because it's dropped to say $100 well the reality is you're only buying 1/7th of what the guy had who owned one share the day before it split. That's not bad. That's great that you can now afford one share but truth is you're not getting the same value in the share.

Regarding "whereas with it's current per share price of $566 it may reach a ceiling in value."

This is where you're going wrong. There stock price is the effect, not the cause.

Spot on. Words for the small investor to heed. a 20% increase in your investment is the same if you have 1 share at $200 or 200 shares at $1.

I'm not sure why it's so common to be challenged by the math of a stock split. By the numbers, it is absolutely meaningless. Funny, Chris did pizzas here, as I did a 10 dimes vs 1 dollar example in the earnings discussion.

I will add that while mathematically meaningless, stocks are purchased by humans and the split has a couple of impacts on emotion. "Perceived upside" increases when the stock price is smaller. More people think Apple could double when it's priced at $80 vs $560. All the ratios are the same, but emotions are important and sometimes these beliefs become self-fulfilling prophecies. Another area where they come into play are emotional (vs. technical) levels of resistance. If a large swath of investor bought into Apple at $700 and have been in the red for a long time, a good portion of them would unload the stock (again for purely emotional reasons) when it hit $700 again. The selling triggered at this price becomes resistance to the stock breaking above that level. After the split, the same level of emotional resistance will not be there. Interestingly, that level now becomes $100 which could be perceived as an emotional milestone in itself.

Thanks for the explanation. But, can you explain how this split might (might not) affect Apple's quarterly dividend? For instance, if I own a certain number of Apple shares now, than possess 7 times that number after the split, how does the split impact my quarterly dividends?

I think a couple of the important things being missed here and that is regardless of the fundamentals of a company, price action is dictated by the buying and selling of stock, and the perceived value of it. As an example, let's say intraday the stock is 600 even. Throughout the day, it trends as high as 605 and as low as 595. Have the fundamentals changed in anyway during the day? No. The only thing that has changed is what a person valued the share of stock. The other factor to consider is the liquidity of a stock. At 600 a share, with let's say an account of 6000, you can only buy/sell 10 shares, which won't be able to move the stock in any direction. As for people posting saying that at 100, you'll only have 1/7 the value as the guy who had it at 700, is totally irrelevant. If I trade a position that's worth 600, and I only have 1 because I can't afford any more, if it moves 10 cents, what have I made? 10 cents since I only owned 1 share. Now post split, if I own 7 shares and it moves 10 cents, what have I made? 70 cents. And because the price is now more affordable, more people will be participating which means more liquidity and more volatility, the two things needs to make money off stocks.