Apple Announces Stock Split
What is a stock split and why you should care?
Last evening, I got a message from my investment platform.
It was a ‘New Corporate Action Notice’ about Apple’s (NASDAQ:AAPL) Stock Split.
Apple Inc. will be splitting its stock — for the fifth time.
What Is a Stock Split?
A stock split is when a company decides to split (divide) one stock into a few stocks.
It’s like splitting a bill or slicing an apple.
So if you hold stocks in Apple, you’ll still have the same amount of Apple but it’d be cut into tinier bits.
Let’s Do The Math
Assume you have one share in Apple and its price is $450.
When Apple splits it into three shares, your shares will still be worth $450 but instead of having one share worth $450, you’ll have three shares worth $150 each.
Yes, it’s straight math.
Why Would They Do This?
Let’s go back to the bill example.
Why would you split a bill into parts?
Maybe because you want to make the meal more affordable. Perhaps you want more people to join in.
In the same way, companies split a stock when they want to make the stock more affordable. Stocks are usually split into two or three bits.
Why Does It Matter?
Mathematically, the split itself doesn’t add any real value. If you have one share, you’d end up having three, yet the total value of your stocks would be the same.
However, a split signals optimism for the future price. A lot of this is psychological though as investors, we tend to back emotion with action.
1. Past Uptrend
For starters, the split is usually an event that happens after the stock has rallied a fair bit.
For example, Apple’s share price has doubled since the end of March this year. The stock was trading at just over $220 on the 23rd of March 2020 and it closed at $458 on the 17th of August 2020.
2. More Buyers
A lower price makes the share more affordable and more buyers will therefore consider the stock.
For example, some of us might have felt that $450 was too much to spend on one share, but we might be more willing to buy it at $150.
3. More Liquidity
A cheaper stock is relatively easier to buy and sell. Just as an apple is simpler to move around than a watermelon!
For example, the most expensive stock in the world, Warren Buffet’s Berkshire Hathaway (NYSE: BRK.A), is priced at just over $310,000 as on 17th of August 2020. Now that’s not so simple to sell or buy for many of us. They’ve never had a stock split.
4. Future Outlook
No company likes its stock price to go down.
So a stock split signals that the company is not worried about a downtrend but is confident of a continued uptrend. Therefore, by splitting the stock, they’re trying to retain liquidity by making sure that it doesn’t get too expensive for some.
5. The Trend is Your Friend:
Stocks that have been performing well, tend to continue performing well.
Also, historically, stocks that have split, have outperformed the market.
So that’s a dual trend going there — or maybe it’s called a convergence of trends. Either ways, it’s on trend!
How Many Times Has Apple Split its Stock?
Apple’s stock has split four times since the company went public and with the upcoming split, this will total to five splits since 1987.
I didn’t get a stock back in 1987 but I tried the math.
One Apple stock in 1987 would now equate to 168 Apple stocks.
Here’s how I worked it.
1987: The stock split on a 2-for-1 basis: One share would become two
2000: The stock split on a 2-for-1 basis: The two shares would become four
2005: The stock split on a 2-for-1 basis: The four shares would become eight
2014: The stock split on a 7-for-1 basis: The eight shares would become 56
2020: The stock split on a 3-for-1 basis: The 56 shares would become 168
In 1987, the stock was worth $79 before the split and if we estimate that after the split on the 31st of August 2020, each share will be worth $150, then an investment of $79 in 1987 would be worth c. $25,000 in 2020.
Does it only happen only with stocks?
Not really.
From 1910 to 1966, Australia’s currency was the Australian pound. It was then split into two Australian dollars.
Can This Happen in Reverse?
Reverse stock splits are the exact opposite so yes, that’s possible too. This is when several shares are consolidated into one.
What Could This Mean for Your Portfolio?
If the theme of stock splits is of interest to you, here below are two ideas to continue your research for stocks that you might like to invest in.
1. Companies with High Priced Stocks:
There are 29 U.S. companies with high priced shares ranging from Berkshire Hathaway which is over $310,000 a piece to others that are closer to the $500 mark.
2. Stock Split Calendar for 2020:
Alternatively, if you want to see the stocks that are definitely heading for a split, then here’s a link to the 2020 stock split calendar.
One idea might look for the names that appear on both lists, such as Tesla, because then you’d know that they priced high and heading for a stock split.
Because if you decide to wait for Berkshire Hathaway to announce a stock split, you could be waiting a while.
Some people prefer to buy just before the split while others prefer more confirmation and will wait until after the split.
Many of us are bargain hunters searching for stocks that are selling cheap.
While stock splits aren’t for the faint hearted, there’s certainly a story here for those willing to do their research and act on their convictions. Or for those who’ve always wanted a slice of the Apple but thought it was too big to bite into.
