With a stock price of $284 and change, Apple (AAPL) is one of the highest-priced big-time tech stocks in the market, second only to search-giant Google (GOOG).
That means that a lot of individual investors are hesitant to buy Apple, if for no other reason than they can only by a limited number of shares at one time.
This is even though there’s no difference between owning 100 shares of a $10 stock and 10 shares of a $100 stock – you have the same amount of money at risk.
So Why Even Discuss Stock Splits?
David L. Ikenberry of Rice University and Sundaresh Ramnath of Georgetown released a study entitled Underreaction to Self-Selected News Events: The Case of Stock Splits in 1999 which was later updated in 2001.
Here’s what they found:
Prior studies that report abnormal return drifts subsequent to splits do not appear to be spurious, nor a consequence of misspecified benchmarks. Using recent cases, we report a drift of 9% in the year following a split announcement. We consider fundamental operating performance as a source of the underreaction. Splitting firms have an unusually low propensity to experience a contraction in future earnings. The evidence suggests that investors underreact to this information. Analyst earnings forecasts are comparatively too low at the time of the split announcement and appear to revise sluggishly over time, a result consistent with underreaction by markets to corporate news events.
In plain English, this means that companies that announce stock splits tend to:
1) Outperform stocks that don’t split by 9%
2) Have Earnings Power That is Underestimated by Wall Street Analysts
Apple’s Stock Split History
Apple went public on December 12, 1980 at $22 a share. Split-adjusted, the IPO price is $2.75.
Since then, Apple has had three stock splits:
- June 16, 1987 – 2 for 1 split
- June 21, 2000 – 2 for 1 split
- February 28, 2005 – 2 for 1 split
So unlike Google, there is definitely a precedent for Apple to split its stock. The two most-recent splits have come under current CEO Steve Jobs, and since the last split in 2005, Apple’s stock is up over 500%
Why We Should Hope For an Apple Stock Split
By all indications, Apple’s core business is doing extremely well. The iPhone is still backordered on Apple’s website, and back-to-school reports indicated that Macs are all the rage for college students. Plus, the iPad continues to dominate the nascent tablet-PC market.
However, as evidenced by the Ikenberry/Ramnath study, a split is a good indication that we can have confidence in a company’s operating performance.
No company would announce a split if it believed it was at risk, because a stock price can also go too low. Some institutional money managers won’t touch stocks priced under $5, or even $10.
So while Apple announcing a split wouldn’t actually drive earnings – it would be a sign that we can expect the company’s momentum to continue.
disclosure: long Apple (AAPL)
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