Why Apple’s Stock Split Truly Shocked Shareholders

Tech giant Apple [AAPL] has broken all the rules of stock market investing. Its huge returns in 2019 and so far in 2020 fly in the face of those who’ve said that the iPhone maker’s best days are behind it. Its market capitalization of nearly $1.8 trillion seems too large for further gains, yet Apple keeps breaking the law of large numbers to push ever higher.

This article was originally published on MyWallSt — Investing for Everyone.

Now, Apple has once again flown in the face of convention, this time with its stock. In an era in which stock splits have almost disappeared, the Cupertino-based tech giant said that it would split its shares 4-for-1. Although the decision wouldn’t have seemed out of place as recently as a few years ago, it now is sparking a lot of discussion about whether more companies will follow suit with stock splits of their own.

Hardly an unprecedented move

Apple is no stranger to splitting its shares. It has done so on four prior occasions, as you can see below:

Source: Apple investor relations. *Latest stock split is still pending as of publication date

When choosing to split its stock, Apple typically followed the rules that prevailed in the broader stock market at the time. Apple’s first stock split in 1987 came after the stock price had reached roughly $80 per share. A 2-for-1 split gave Apple plenty of breathing room to avoid triple-digit share prices. When Apple stock next came near the $100 mark in 2000, another split sent the share price back downward. Similarly, Apple traded in the low $80s in 2005 when it did its third 2-for-1 stock split.

A change in split strategy

By then, however, companies had started to change their stance toward stock splits. Many companies no longer felt it necessary to keep their share prices at relatively low levels. As a result, when Apple once again approached $100 per share, the tech giant did nothing. The stock price continued to move ever higher; it was interrupted briefly by the financial crisis, but eventually moved to $700 per share. After 2005, Apple adopted a new approach. Even though the stock climbed into the triple digits by 2007, the company didn’t use its previous playbook and instead allowed its shares to continue to appreciate. Despite dramatic volatility both before and during the financial crisis in 2008 and 2009, Apple quickly rebounded and soared to as much as $700 per share by 2014.

At that point, Apple broke with the new tradition and decided to split its stock again. The company trotted out the usual explanation of making shares more readily available to investors. Yet as it happens, the split likely proved instrumental in allowing Apple to become part of the Dow Jones Industrial Average [DJI]. The price-weighted average would’ve been hard-pressed to accept Apple’s commanding influence if its stock price had remained at $700 or more. After an unusual 7-for-1 split, shares in the low triple digits were quite reasonable to factor into the Dow’s calculations.

Another game-changing move

Six years later, Apple has once again defied convention. Even as tech rivals push headlong into four-digit territory, the mobile device giant has returned to its usual modus operandi, choosing a 4-for-1 stock split that should return its stock price to right around $100 per share. Once again, Apple argues that it wants its stock to be more accessible to a broader base of investors — even though innovations like odd-lot trading and fractional shares have made stock price much less important than it was earlier in Apple’s history.

What’s surprising is that there was no apparent ulterior motive for doing the split. Sure, Apple has by far the highest share price in the Dow, so it has a 10% weighting in the average. Yet the company’s huge market cap gives it equally heavy weight in other indexes. In the S&P 500, for instance, Apple’s weight is approaching 6% — and the S&P is a much broader benchmark than the Dow.

What Apple’s stock split really means for investors

Stock splits make no real difference in the value of the company. After the split, shareholders will own four times as many shares, with a share price roughly a quarter of what it was prior to the split.

However, investors are taking the news as a sign of confidence that Apple can continue to see its stock rise. For a company as big as Apple has become, that’s a pleasant surprise — and it’s one that could propel Apple’s share price ever higher even after the split takes effect in late August.

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