I've read this entire thread once, then scanned it a second time for the word, "splits" - as of 124 comments, nobody has suggested a rational reason as to why Apple would split their stock. There were two implications of splitting the stock, one was that options plays (which normally trade in groups of 100, though some more expensive "minis" are also available) become more inexpensive, and some hand waving about "more people can afford the stock, therefore more demand, therefore greater impact on the price" - which I've heard for 20 years, and I believe has been fully debunked (the counter argument is that if the underlying stock has an actual value, and greater availability pushes stock above that value, then rational people can profit by shorting the stock/selling it until it reflects the actual value)
I'm always confused when an otherwise sane company starts playing with this type of financial engineering, the only people who really seem to profit will be the team who manages the split - and I often wonder whether a split is just some way of rewarding them with business, in return for some type of off books advantage.
Is there any other rational reason why a company might want to split? Does it give them some way of controlling their shares more effectively by splitting them -I.E. When the stock splits, do they get an enumeration of their shareholders that they might not otherwise have?
Anybody been involved in a stock split that can explain what the behind the scenes reasons totally not related to the "stock is cheaper so more people can buy it" excuse is?"
I'm anything but expert, but here's a set of thoughts:
Consider the opposite extreme, Berkshire-Hathaway, where the stock is deliberately not split in order to attract only those investors with, today, $191,000 to spend on a single share. The argument in favor of such a strategy is to attract only investors who are likely to take a long view of things. It may also discourage selling, as it can't be done piecemeal.
(Yes, Berkshire has a substantial number of Class B shares with diminished voting power that trade in the $100 range after splits, but the company was cajoled by circumstances into issuing them; people were beginning to develop Berkshire-tracking funds.)
If you want your company to be accessible to the little guy, and your company's doing well, you'll have to split sometime. Furthermore, if you're a shareholder and you're interested in shorter-term trading, you might cajole your company into splitting.
Why would you care if your company was accessible to the little guy? Those stocks are sold - you never get more money from them unless you issue new stocks, no matter how they are traded in the future. (Stocks seem like a pretty bad deal for the company anyway: get funded via IPO, be forever beholden.)
In fact, they're a liability. So what benefit to a company from increasing the number of people you have to answer to?
If your stock is accessible to more people, there's higher demand, which should drive up the price, benefiting those who hold the stock (and make the decision to split).
"If your stock is accessible to more people, there's higher demand" - this the answer 90% of the time, but I don't believe there has ever been a study (and I've read three or four) that suggests there is any evidence this is true.
To make what I consider to be a not unreasonable comparison, "The standard gold bar held as gold reserves by central banks and traded among bullion dealers is the 400-troy-ounce (12.4 kg or 438.9 ounces) Good Delivery gold bar." [1] - that gold bar currently sells for $41,260 [2] * 12.4 or $511,624/bar. There does not seem to be any difference, per ounce, in price between a one ounce nugget and a 438.9 ounce unit (indeed, there seems to be some transaction costs that imply the larger bar is less expensive per ounce)
For a mature company that is throwing off lots of profit and cash , there are a lot of investors who are analyzing the Discounted Cash Flow of that company, and paying for the stock based on that number. Apple, for better or worse, has entered that realm. Therefore, if they trade significantly below their cash-flow value, those investors will buy up the stock, if they trade significantly above it, those investors will sell the stock (or short it if things get too far out of whack) - It doesn't matter if the stock is selling for $100, $1000, or $10,000/share.
But, the people who run Apple have access to the best advice that money can buy, and they have made this decision - what I'm interested in, ideally from someone who has worked behind the scenes in this kind of really-big-company stock split, is the real reason why this is done. I have a theory it's a mechanism to reward bankers with a lot of business with useless make-work, in return for getting positive ratings moving forward - but I'm open to other theories.
[Edit - another Theory is that Tim Cook and/or his CFO Peter Oppenheimer are just fed up with being asked about a stock split, and given that the stock split is an absolutely meaningless event, that has no negative/positive impact on the company value, but will eliminate the ongoing nagging of people about it, just decided to eliminate that annoyance. My counter argument to that would be is by giving people something meaningless to complain or ask about, you distract them from other things that you would prefer they not spend so much time on - so it's good to leave a few of these around as decoys.]
We can't really get into Tim Cook's mind or his advisors' but whatever their motivation is, it's not guaranteed it's very rational or scientific.
As you note, what matters for a company's valuation is the discounted (present) value of all their future cash flow (+ their book value). Unfortunately no one knows what that number is because no one knows what the future cash flow for AAPL will be. People know the history, the reported numbers, and they make guesses about what the future value of the company will be. There aren't many business where you can predict with any degree of accuracy into the future and Apple specifically, unlike someone like Coca-Cola, isn't in a very predictable market.
Even if you could predict AAPL future cash flows very accurately you would also need to predict future interest rates to be able to set a multiple on those cash flows to esablish a valuation.
To conclude, just because a lot of investors are "betting" on AAPL doesn't necessarily mean that its share price is a better estimate of its true value. If the market collapses tomorrow AAPL is going to fall just as quickly as the other large and small stocks. No one is going to care what those analysts predict the future cash flow will be. What is true is that it is a lot harder for people to manipulate the share price compared to smaller cap stocks with smaller volumes.
I don't think the analogy to gold is strong, mainly because any holder of 400 oz t gold bars can freely convert them to smaller units, the old-fashioned way. You can't do that to a BH share certificate, or at least it doesn't work as well. ;)
While it's not a 100% analogy, it's 99.99% - Good Delivery gold bar are virtually never converted to smaller units. Indeed, it's rare that they are ever even moved from their vault (though that does happen on occasion).
The point I was trying to make is not that Gold Bars are impossible to make smaller, but that their very high price "per unit" doesn't result in any lower-prices per ounce than if they were broken down into smaller units. I.E. There is no pressure to reduce the size of Good Delivery Gold Bar's - the market realizes that just because they are expensive per unit, it doesn't reduce their price per ounce.
In the case of Apple, anybody who is investing in stock, should be able to afford $500. I can understand the desire for tracking funds/BRK-B, when it comes to $150K+ shares on the part of an investor, who may not have $150K laying around to buy "a" share. In this scenario, there was a very real risk that third-parties would start buying up Berkshire Shares, and get voting privileges, while reselling the tracking stock. I think this is an issue for stocks once they get north of $10K (though, it's already an issue with other index tracking stocks - it just gets a little accelerated when the index consists of only one ticker)
One other consideration is that, at its current price, Apple is not able to be considered for inclusion in the DJIA since that index is price-weighted and Apple would account for a huge portion of the index.
After the 7-1 split, Apple will be a likely candidate.
Yes -how insane is that. When I first heard of it, I was almost certain that the person was wrong - but 5 minutes on wikipedia proved they were correct.
But, once again - if the automated purchasing for the stock drives the value up too high, then people will make money selling it - I don't buy into the "inclusion in the indexes drives up long term valuation of a company" - would be interested if anybody has a study that shows otherwise.
The most interesting example is Royal Dutch vs. Shell Transport. Both companies had equal shares in Shell Oil - Shell Transport was in the S&P 500, Royal Dutch was not, and sold for much less, despite having identical economic interests - until they finally merged in 2005.
When Yahoo was added to the S&P 500, its price jumped 24%.
The name for this anomaly is usually called the "index effect", and whether it affects valuation is controversial.
I can't speak for Mr. Cook, but I wished to myself "please split AAPL" just the other day.
I hold AAPL and I would like to let my dividends roll over via a DRIP managed by my broker. But at current prices, yield, and dividend frequency ($525, 2.3%, quarterly) I would need to hold $90k of AAPL for a dividend payment to buy a single share -- a bit rich for me. But after the split, that number goes down to $13k.
Hopefully your AAPL is in a non-taxable account. Otherwise you are setting yourself up for this [1]:
If all this seems complicated -- it is. A lifetime
of DRIP investing may create a morass of tax
obligations when the time comes to sell the DRIP
shares, with at least four new cost bases of DRIP
shares established each year (when dividends are
reinvested) as well as when any OCPs are made.
The first time I saw my accountant he literally shook my hand when I told him I didn't do DRIP.
Does your broker allow fractional shares in your DRIP? I hold a couple shares of AAPL in a Vanguard brokerage account and haven't had any problems reinvesting dividends for fractional shares.
It's just about the psychology of price. People are influenced by the share price. A share price of under a dollar seems cheap and a share price of 500 dollars seems expensive regardless of the actual market cap.
It's just like the psychology of Daylight Savings time -- even though people could get up an hour early in the summer, they won't unless the clock tells them it is time to get up.
DST actually causes more problems than it solves. It would be more beneficial to eliminate DST entirely, simplify time zones dramatically, and just let people do what they want with their time.
DST is meant to solve the problem of 'sun comes up earlier', but all it accomplishes nowadays is to ensure that you get to work closer to the same amount of time after the sun comes up, which makes no real sense. In effect, it shortens mornings because you just end up stuck at work faster.
As a surfer, I get up 1h15m before sunrise regardless due to winds. I'd be getting up at 4:00 am tomorrow without DST. This sounds awesome until you realize I'd have to go to bed at 9, and most people are still up at 9.
It keeps the outdoors set (including construction, aviation, farming and landscaping) in sync with the indoors crowd.
But, if that's the case, then people who are not dealing in pop-psychology, but instead in cold-hearted company assessment would stand to make a lot of money, and, in doing so, would quickly drive the value of AAPL to it's correct number.
If the markets were efficient or in any way a true reflection of value that might be the case. In reality this sort of change can impact the percived value as can a lot of other noise people react to every day. As they say, in the short term the market is a beauty contest, maybe the act of splitting makes the company looks cooler, proactive, smart. Who knows.
Whenever people are concerned there's no such thing as cold-hearted assessment. The only trading entities that are cold hearted are algorithms.
I absolutely agree with you that there are a lot of people who will purchase the stock out of emotion just because the stock now seems more "affordable" - but I'm saying those people who enter the market and play on emotion and "gut feel", will be absolutely destroyed by the professionals who have vast amounts of information and insight into what the long term price of these stocks will be. Those "professionals" may blow the occasional call, but, in the long term, over hundreds/thousands of stocks - they will move the market to the the long term "weighing device" valuation.
So, yes, if Apple were looking for a short term bump in AAPL, perhaps a stock split might, just might be the right play - but, for long term valuation, I am struggling to understand why a stock split has any merit whatsoever.
I used to work for a pre-IPO startup that had experienced a pretty big run-up in their stock price. As a result, their new hires were getting options to buy 200 shares at $100 per share. (I made up those numbers, but you get the idea.) They did a big stock split partly to change the numbers in stock option offers. Apparently it was much more enticing to offer candidates options for 2000 shares at $10 per share. Even though the options would have the same total value, they believed candidates would respond much better to an offer of "more options."
That's a very interesting and insightful angle - If Apple is handing out $50,000 worth of RSUs to new hires vested over 4 years, then currently new hires get 100 shares. While, in theory, a new employee should be fine with 100 shares or 700 shares, human emotion being what it is...
Though -on the flip side - I'm wondering if an employee of any merit has decided not to work for Apple because they got "100 $500 shares" instead of "700 $71 shares"
According to Bloomberg [1], this removes an obstacle for Apple's inclusion in the Dow Jones Industrial Average. The index weights stocks solely by their share price. Splitting up AAPL 7:1 should produce a new share price of around $75, close to the DJI mean of $85.
Anyone have any more information than I do about the AAPL vs. GOOG question?
For quite a while, AAPL and GOOG traded blows in the mid-hundreds range and both generally rallied 2000-2008. As of right now, they're still quite competitive.
Would the stock split be an attempt by AAPL to avoid the comparison?
GOOG split in early April to create a third class of shares (Class C) that allows the founders to maintain control the company through their shares (Class B) for the foreseeable future. They had issued so many Class A shares, their 10:1 voting rights were becoming diminished.
I have not been involved behind the scenes. I'll point out liquidity seems like a likely advantage of splitting shares. You can do smaller trades with a wider audience/more frequently. The added liquidity would also make the shares more valuable to certain classes of traders which may raise the price.
Liquidity would possibly be an issues with BRK-A, where 149 shares traded today (though I could make arguments as to why not) - but, AAPL traded 14mm+ shares today. I don't think you would have any problem finding someone to buy your shares at a reasonable spread within seconds. So, I don't buy liquidity as an issue in this situation.
I'm always confused when an otherwise sane company starts playing with this type of financial engineering, the only people who really seem to profit will be the team who manages the split - and I often wonder whether a split is just some way of rewarding them with business, in return for some type of off books advantage.
Is there any other rational reason why a company might want to split? Does it give them some way of controlling their shares more effectively by splitting them -I.E. When the stock splits, do they get an enumeration of their shareholders that they might not otherwise have?
Anybody been involved in a stock split that can explain what the behind the scenes reasons totally not related to the "stock is cheaper so more people can buy it" excuse is?"