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Apple may split its stock and become a member of the Dow Jones Industrial Average -- but it doesn’t matter

There’s an interesting story over at Businessweek talking about the possibility of Apple splitting its stock price, and possibly even earning a coveted spot as one of the 30 stocks that make up the Dow Jones Industrial Average (DJIA). This is all due to a research piece that Toni Sacconaghi, the Apple analyst at Bernstein, published recently.

The gist of the story? Sacconaghi makes the interesting point that Apple is the only dividend-paying company with a market cap over $215 billion that isn’t included in the Dow. But if it were included in the index, its would command a large weighting. This is because the DJIA uses stock price as the weighting mechanism. The solution is for Apple to split its stock in order to improve its chances of being added to the index.

Other technology companies in the index include Cisco, Microsoft, HP, IBM and Intel. Given that Apple is the largest company in the world (by market cap), shouldn't it be included?

You know what? Maybe Apple should be added. But I just don’t see why it matters beyond the short term gyrations of the stock market.

Does being included in an index make your company more valuable? Not really. Smaller companies that get tossed into the S&P 500 might get more credibility for being part of a serious index. But a company of Apple’s size and stature? Nobody is going to buy a Mac or an iPad because Apple’s in the Dow. It doesn’t change a darn thing with respect to the business.

And how about a stock split? Same thing. There is no long term evidence that a stock split creates value for shareholders. If you’re reading this and wondering what a stock split really means, think about ordering a pizza and getting it pre-cut into 12 slices. If you took that same pizza and cut each slice in half, you’d suddenly have 24 slices. Does it change the size of the pie? Rhetorical question.

Stock splits used to matter when stock exchanges were less electronic and stocks traded in 100-share lots. These days if you want to buy a single share, you place a buy order online and it gets done in a nanosecond. Stock splits are essentially irrelevant unless the price of a single share goes beyond the reach of a potential shareholder.

I haven’t seen the Bernstein research note discussing this whole concept, but I hope it contains more than just a discussion on stock splits and DJIA participation. Because, honestly, none of this really matters at all to shareholders beyond a bit of short term waves created as index funds buy into a newly-added stock. It isn’t exactly what I would consider value-added research.

I’m signing off to open a cold drink. Perhaps I’ll pour the contents into two glasses. Then I get more, right? #sarcasm. Source: Businessweek

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

  • It all depends on who you want to be buying your stock. In previous decades having a high priced stock made it difficult for the average investor to purchase shares since most purchases needed to be made in lots of 100. Then most companies tried to maintain a stock price below $100 by splitting if it got too high. But today you can buy one share. Also today a high price seems to be a badge of honor for newer technology companies. It makes them appear "hot." But if you still want to have the little guy buy your stock, then a low price (<$100) is what you want.
  • Much of what you say is true except that it does matter to some investors. Spot on that yes you're not getting any more. And the institutional investor doesn't care. The difference though is to the average individual investor $600 "feels" expensive. It's irrelevant that if it splits 6 ways you're getting nothing more or less but the psyche of the individual investor does matter to that investor. And they are more likely to invest if they feel comfortable. And the other benefit is a split has the potential of putting your shares in the hands of more individual investors and less institutional ones. Now me it doesn't matter to me. I'm with warren buffett. But the reality is Berkshire A is like $127,000 per share. That's simply out of the price range of many people. An extreme example but it illustrates the point that there is a point where if you don't split a stock it's gonna limit who has access to it.
  • I think you are overlooking the fact that every Dow Index tracking fund & ETF will have to buy the stock if it is added to the Dow. While this has no effect on the underlying business as you stated, it will increase the demand for the shares, causing the price to rise.
  • so very right.
  • not only that... there are much more reasons for a stock split ... and it definitely brings lots of value to
    the original shareholders... the fact that AAPL did make only one single split in last 12 years only shows that they ... same as Chris here don't know much about stock market ... Chris should maybe
    try to cut his head in 24 pieces to see if he get more brain : )