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Apple Inc. splits its shares seven-for-one. (© Robert Galbraith / Reuters)
Apple Inc. splits its shares seven-for-one. (© Robert Galbraith / Reuters)

VOX

Apple just made stock splits cool. So what's stopping the holdouts? Add to ...

Apple shares once topped $700 (U.S.), then fell below $400, and are trading this month above $600 for the first time in more than a year. All those nice, big numbers are heading to the dustbin in the coming days, however, as Apple splits its shares seven-for-one.

It is said that once Apple Inc. began its remarkable run, founder Steve Jobs was dismissive of the idea of splits. So – for a time, anyway – was his successor, current CEO Tim Cook, who told shareholders two years ago that splits “do nothing” for investors. Better to let the sticker price of the stock escalate to the levels of the company’s shiny gadgets, one supposes.

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Splitting shares, however, does accomplish something: It makes it slightly easier for individuals to buy a stock. Now that Apple has conceded on this matter, then, it’s time for some other companies – and yes, we will name names – to stop acting so cool and follow suit by splitting their shares. For investors’ sake.

Apple’s split is scheduled for June 9, benefiting all who own the shares as of June 2. In the strictest sense, the split will “do nothing,” as one Apple share trading at $700 is no more valuable than seven Apple shares trading at $100. That’s the basic economics of a stock split, and the reason why market professionals say splits have little meaning.

It’s certainly true if each of your positions is measured in millions of dollars, or even hundreds of thousands. There are individual investors, however, who want to invest a couple of hundred thousand dollars in a couple of dozen stocks. That means positions in the $5,000 to $10,000 range.

If you decided in late 2012 (like I did) that Apple’s fall from $700 to $500 was an interesting opportunity, a $5,000 investment got you all of 10 shares. If you wanted to adjust your ownership after your purchase, you had to buy or sell at least 10 per cent of your holding at a time.

There will be wealthy investors who will be indifferent to this. If you can’t afford more than $5,000 of Apple, or anything else, then you shouldn’t be in the market, they’ll say. Fine – but these individual investors are out there anyway, buying shares and supporting stock prices. The idea, one would hope, is to make a stock more attractive, not less, to them.

Academic research has suggested stocks that split tend to outperform the shares of similarly sized companies in the near term, in part because they’re an underappreciated signal of confidence: A management team that recommends a split to its board is confident the shares won’t drift lower. There are plenty of holdouts these days, however, as the number of splits among companies in the S&P 500 has drifted lower since the Great Recession – possibly because management watched big companies such as Citigroup do a “reverse split,” decreasing their share count, in order to keep the stock from trading below $5.

Some split opponents use long-term thinking as an excuse: Warren Buffett would still have nothing but a $191,000 stock had he not been forced by investor demand to create “B” class shares that were actually affordable. Canada’s version of Mr. Buffett, Prem Watsa, has a $465 stock at Fairfax Financial Holdings Ltd. The idea with these long-term money managers is that their shareholders should be focused on the long run, too – and a high share price keeps out dilettantes.

There is less justification for high share prices at certain operating companies, many with a relatively short history on the public exchanges. Priceline Group Inc., public since 1999, now trades for more than $1,200 per share. Chipotle Mexican Grill, public since 2006, trades for more than $500 a share. Google Inc. screwed up by taking a $1,100 stock and splitting it just two-for-one, giving it a $550 sticker price. Auto parts retailer AutoZone Inc., which seems to be ripe for consideration by the small shareholder, is now above $500 a share.

All of these companies have fine growth prospects, as evidenced by earnings multiples that are at or above, some well above, the market average. All could expand their investor base even more by cutting the sticker prices on their shares.

Apple stock is up nearly 20 per cent since it announced its split. To be clear, the biggest reasons are a dividend increase, significant boost to its share buyback, rumours of a deal to buy the Beats music company (which Apple confirmed after markets closed Wednesday), and excitement that Apple will finally announce a new product.

But the split news didn’t hurt. And if Apple can descend from its exalted heights and let a few more shareholders in – well, the remaining companies who choose snobbery over liquidity deserve ignominy.

 
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