Apple to Split 7-for-1

Yesterday, Apple (AAPL) announced that it will split its shares 7-for-1. This means that investors will own seven times their current number of shares, and the share price will fall to one-seventh its current level.

Obviously, a stock split doesn’t add any value so why do companies do them? You’ll often hear that a stock split adds liquidity to the stock, but a company like Apple trades so much that it’s hard to see how that matters.

It also seems to be a sign that a growing company is one that splits its shares regularly. I can see why a company would split 3-for-1 every decade or so, but I don’t get the small increases. JetBlue (JBLU) split its stock 3-for-2 three times within three years even though the stock hadn’t done much. Beats me. I guess it sounds like something good to announce.

For some reason, retail investors seem to have a strong aversion to higher-priced stocks. Anything above $100 per share scares them. Of course, one stock can be a bargain at $200 while another can be vastly overpriced at $7.

In Apple’s case, they could be playing to get into the Dow Jones 30. Since the Dow is a price-weighted index, a $560 share price would have an outsized influence on the index. But an $80 value could be more reasonable in the eyes of the index keepers. Right now, Travelers (TRV) is the smallest company in the Dow. In fact, if its market cap were to double, it would still be the smallest company in the Dow. Apple is worth more than 15 times Travelers, so I think TRV is a top candidate to get the boot.

Posted by on April 24th, 2014 at 10:54 am


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