Apple Inc. (Nasdaq: AAPL) just announced a historic 7-for-1 stock split that will drop the price of Apple shares from about $600 all the way down to about $86.
While academics typically dismiss stock splits as "book-keeping" maneuvers that have little actual impact on the underlying profit opportunity, retail investors usually get pretty stoked when a "name-brand" stock announces a split.
Today I'll explain why. And I'll also show you how this AAPL stock split can give your investment portfolio a nice little additional jolt.
AAPL's Split Decision
Over the last year, we've talked a lot about the difference between a stock's sticker price and its value. As I have said many times, a high-priced stock that gains 50% is cheaper in the long run than a penny stock that gains only 20%.
Now, Apple isn't that kind of high flyer, but it's a quality stock with rock-solid fundamentals. And that's why I wanted to tell you about how this tech stock - one of my all-time favorites, in fact - will soon be available at sharply reduced prices.
The AAPL stock split will take effect on June 9 for shareholders of record as of June 2. So that makes this a timely discussion.
Before we talk more about the specifics of the Apple transaction - and look at how it can help you - let's first take a look at stock splits in general.
First, to be absolutely clear, a stock split does not affect the market cap of the stock or any of the metrics we typically use to analyze the stock.
For instance, say that XYZ Software Corp. has been trading at $100 a share and then splits its stock 2 for 1. That means there are now twice as many shares of XYZ on the market, and they cost $50, not $100. Now, $5,000 buys you 100 shares instead of 50 shares.
You will have invested the same amount, but the entry price is much more attractive.
In essence, companies split their shares to boost the "liquidity" - Wall Street jargon for boosting the shares' allure and increasing their tradability. Cutting the price down makes the stock more attractive to average investors who don't have millions to throw around the way hedge-fund managers or high-frequency traders do.
And there is a tangible benefit - for the company, and for investors shrewd enough to move in and capitalize.
Here's how it all breaks down, and why it's so huge for investors...
Stock Splits Pack a Punch
History shows that stock splits are an excellent deal for shareholders. Investors perceive that company executives are very bullish about the firm's future and often begin piling into the stock, increasing its return.
That's just what business professor and noted market analyst David Ikenberry discovered. He did two studies on stock splits covering 20 years' worth of market data.
Ikenberry concluded that stocks that split beat the market by an average of 8% in the first year and at least 12% over the next three years.
That may not sound like much at first glance. But a 12% annual premium means you would double your returns compared to the overall market in just six years.
One interesting note from Ikenberry's research: CEOs often announce splits at the same time as great earnings news, a fact that gives the stock an extra boost.
And Apple serves as a case in point.
The Cupertino, Calif.-based iDevice maker unveiled its stock-split plan in conjunction with other good news. Indeed, Forbes said that Apple "delivered a trifecta of stock moving announcements - strong earnings, plans to return $130 billion in cash to investors and a 7-for-1 stock split."
Apple's shares - which closed at $524.75 on April 23 - recently eclipsed the $600-a-share mark for the first time since late 2012, a gain of 15% just two weeks.
So knowing that the split will help supercharge its gains going forward, let's now take a look at why I remain high on Apple, viewing it as a fantastic company and value-filled stock.
Slices of Apple (Nasdaq: AAPL) Stock
Before I get into Apple's fundamentals, let me expand a bit on this somewhat unusual stock split. I mean, 7-to-1? That sounds crazy.
Since 1980, only three other companies have had larger share divisions, and all of those were 10-for-1 splits. So consider ourselves lucky that shares are going to cost around $85 and not - as it would have been if the split was 2-to-1 - $300 or so.
I've been telling you for as long as I've been writing Strategic Tech Investor that I love Apple. And the news contained in the stock-split announcement speaks volumes about why I'm firmly in the Apple Bull Camp.
It doesn't get much better than this. Apple announced the split along with its recent stellar quarterly earnings statement. The company:
- Beat earnings expectations: It reported earnings per share of $11.62, an annual gain of 15% that beat consensus views by nearly as much.
- Increased the dividend: Apple is going to raise its dividend by 8%. That would imply a pre-split payout of $3.55 a share, but the dividend will be divided proportionally with the new number of shares outstanding.
- Boosted its buyback: The iDevice king plans to increase its repurchase plan by a stunning $30 billion, increasing the original $60 billion by 50%.
With a market cap of $515 billion, Apple trades at just 12.4 times forward earnings. That's a 25% discount from the S&P 500. But Apple is trouncing the overall market - with a year-to-date gain of 6.7%, compared to the S&P's 2.84%.
Thus, Apple represents the kind of foundational play that I enjoy telling you about. I want you to have a solid base in your portfolio so you can steadily increase your net worth. And the AAPL stock split makes it cheaper - even as it boosts the returns we can expect going forward.
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