Why Some Big Tech Companies Still Split Their Stocks
Investors woke up to a rare sight on Monday: For the first time in more than seven years, Apple stock was set to trade under $100 a share.
The sharp decline in share price was not the result of some apocalyptically bad news story about the company, but rather a previously announced 7-for-1 stock split that officially went into effect on Monday. The move is unusual both because of the 7-for-1 split structure — most stock splits tend to be 2-for-1 or 3-for-1 — but also because stock splits are not nearly as commonplace as they were a decade or so ago.
“It used to be almost automatic that when you had a certain price, you would split the stock. They bought into the notion that liquidity was great when the stock was trading between $30-$50,” said Aswath Damodaran, a professor of finance at New York University’s Stern School of business. “I think increasingly companies have sort of abandoned that idea.”
And yet, this year we saw two of the biggest tech companies in the world move ahead with stock splits: Google split its stock in April for the first time in its history, cutting the share price in half to the mid-$500 range, and Apple split its stock this week for the fourth time since going public.
Google’s stock split, which was originally announced in 2012 and delayed due to shareholder resistance, is typically framed as being a move to help cofounders Larry Page and Sergey Brin maintain control of the company by introducing a new voting class of shares. Some also suggested that it would make Google shares more attractive to retail investors (or individual investors) who might be otherwise feel disinclined to invest by the four-figure share price.
The latter point is one that’s now being cited as a key factor in Apple’s decision to split its stock. Indeed, Apple itself emphasized this reasoning on its website: “We want Apple stock to be more accessible to a larger number of investors.”
“I definitely feel like the company is trying to make the stock more accessible to the retail investor,” says Tom Forte, an analyst with Tesley Advisory Group. “Do I think a ballpark $100 is materially more accessible than $600? Sure. But I think that if they wanted to make it even more accessible, then we’re talking lower than 90 to 100 bucks.”
David Ikenberry, dean of the Leeds School of Business at the University of Colorado, Boulder, went so far as to argue that Google and Apple’s decisions to split their stock represents a notable change in their thinking.
“We went through a period of time, particularly in the tech sector, where some high-profile companies began to set a tone that having a really high share price is kind of a badge of courage,” says Ikenberry. He described this thinking as being influenced by Warren Buffett, the billionaire investment guru behind Berkshire Hathaway, whose Class A stock was never split and currently trades at more than $190,000 a share.
To put that in perspective, Apple’s stock would hypothetically have been trading at around $5,100 a share as of market close on Friday if the company had never done any of its four stock splits, according to data pulled for Mashable by Michael Amenta, a research analyst at FactSet Research. Amazon, which did three stock splits in the late 1990s, would have been trading at nearly $4,000 a share and Microsoft, which has done nine stock splits over the years, would have been trading at just under $12,000 a share.
In theory, the average individual investor would be less intimidated by buying Apple stock at $90 a share than at $650 a share or the hypothetical $5,100 a share. But Damodaran, the NYU finance professor, argues that the idea of attracting a different type of investor through stock splits is “baloney.”
“There’s really no good economic explanation. It’s a gimmick,” he tells Mashable. “It’s a gimmick to draw attention. And it’s a gimmick that sometimes works.”
The gimmick, as Damodaran describes it, is intended to improve the mood around the stock. Under CEO Tim Cook, Apple has issued a dividend, launched stock buybacks and now, split the stock.
If you look at what Apple has done in the last 12 months or so, they’ve pulled a lot of levers,” says Forte, the analyst with Telsey. “These are all efforts by the company to drive the stock’s price independent of their operating performance.”
As Forte points out, the product news expected in the second half of this would like “have driven the price higher.” The stock split is really the “cherry on top of the sundae.”
Apple stock increased by 2% in the year after its first stock split, declined by 57% in the year after its second stock split (which occurred during a broader decline in tech stocks) and increased by 60% for its third stock split, according to The Associated Press. Apple ended the day up 1.6% after the latest stock split.