An Unusual Move for Apple: What Their Stock Split Means

On Wednesday, April 23, 2014, Apple Inc. made an unusual move that raised many questions amongst investors. Apple made the decision to split their stocks 7 to 1, come June 9th. A stock split is a corporate tactic in which a company divides or splits its existing shares into multiple shares. After Wednesday’s closing price of $524.75, the split would value shares at $74.96. Apple is also increasing their stock-buyback program from $60 billion to $90 billion, and raising its quarterly dividend by 8%. But why is the company deciding to reward investors now?

 

One driving factor for a stock split may be due to Apple’s high stock price. When a company’s stock price is excessively high it is difficult for investors to purchase a large amount of stock. By splitting the stock share price per stock decreases significantly. Also by decreasing the amount of stock in the market through buybacks and raising dividends Apple has made their stock more liquid. By increasing the buyback program by $30 billion decreases outstanding stock and increases demand. The escalating interest in Apple stock and decreased pool of total shares, pushed the company’s earnings per share up by 15% from $10.09 to $11.62.

 

Apple is able to increase dividends, split their stocks, and increase their buyback program for one major reason. They have a problem every company wish they had, they are sitting on an enormous amount of cash. Apple reported having $151 billion in cash and investments at the end of March. With this much cash, Apple could easily make acquisitions to expand their operations or increase the budget of research and development to invent the next hot product. Apple has so much cash they could fund the colonization of Mars and still have billions left over. Instead of making strategic investments or going where no man has gone before, Apple is rewarding it’s investors.

 

A company expanding dividends and making investors happy is always considered a good thing. But the concern is: why isn’t Apple making these strategic moves? Mr. Cook states “Apple will take the time to get it right, our objective is not to be first, but to be the best.” Apple has observed what other lucrative tech companies do with their extensive amounts of cash. What they found was, other companies rushing into new product categories and having weak sales.

 

Companies sometimes use stock splits to get their shares included in price weighted indexes like the Dow Jones Industrial Average. Apple has not been on the Dow Jones Industrial Average because they have been consistently the first or second largest market cap since 2010. A 7 to 1 stock split will clear the way for apple to be put on the Dow, positioning them at 13th in terms of weighting. So how would being listed on the Dow Jones affect Apples stock? It would not affect Apple all that much. The Dow Jones Industrial Average’s price-weighted methodology is not widely followed by index funds. In comparison The S&P 500 is widely followed due to its market capitalization methodology, determining a company’s weight based of the size of their market cap. Being added to the Dow Jones will only increase the amount Apple is talked about in reviews of the market.

 

Even though Apple is increasing dividends and their buyback program, they still have a massive amount of cash. Tim Cook gives good indication that the company will not blindly enter a product category just because they can. Instead Apple will make sure that when they do launch something new, it is the best in class.

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