What Apple’s Stock Split Means for You
It’s a great time to be an Apple shareholder!
At the end of July, the stock jumped more than 10% higher after the company reported strong earnings for the last quarter and scheduled a 4-for-1 stock split for the end of August.
The stock split announcement brings back memories of the good ole 1990s during the “dot-com” tech days.
Back then, growth-company managers would announce stock splits as a way of showing confidence in their firm’s prospects.
And investors would often take that confidence to heart, buying more sharesand driving stock prices sharply higher.
Since the dot-com bubble popped, we haven’t seen nearly as many stock splits. So there’s a big question about whether or not this split is a positive sign for investors.
And the bigger question is whether or not you should buy shares of AAPL after the stock’s breakout.
Let’s take a look at what’s going on…
A Stock Split Technically Doesn’t “DO” Anything
Apple’s 4-for-1 stock split is scheduled to go into play when the market opens on Aug. 31. Here’s how the process works.
If you own 25 shares of AAPL today, your shares will be converted to 100 shares on Aug. 24 (and they will begin trading on Aug. 31). And let’s say if AAPL shares are trading near $400 before the split. They’ll trade near $100 after the split. (I’m using round numbers to better show how the situation works.)
So in this scenario, your shares of AAPL would have been worth about $10,000 before the split. (That’s 25 shares multiplied by a price of $400.) And following the split, your shares will still be worth about $10,000. (After all, 100 shares times $100 is still $10,000.)
Apple’s dividend will also be adjusted.
Prior to the stock split, shareholders will receive a quarterly cash dividend of $0.82 per share.
And in the months following the stock split, we can expect AAPL shares to receive $0.205 per share. But remember, each shareholder will have four shares for every share they used to own.
So the amount of income you’ll receive from AAPL will still be the same — at least until the next time AAPL’s board decides to increase its normal dividend.
According to the math, nothing actually changes when it comes to an investment in AAPL. The value of your investment should stay the same, and the amount of income you receive from your shares will also be the same.
So what’s the big deal about stock splits? And should you be using your retirement savings to invest?
It’s More About Perception
When a company like AAPL trades higher following the announcement of a stock split, the advance is more about perception than any specific metrics for the shares.
Traditionally, a stock split has happened when management feels optimistic about the company’s future.
The logic is that since the company is continuing to grow, management decides to split the stock to make each share more affordable to future investors. It implies that management is confident that the stock will not trade back lower (and lead to an “embarrassing” stock price below $10).
On the investor side, a lower split-adjusted stock price can make it seem like the stock is more affordable.
But as we know from the math above, nothing really changes.
Apple is still the same company. Investors should still have the same amount of value after the split. And the income you receive from holding your new shares is the same as the income from before the split.
But in the game of investing, perception is still important!
While institutional investors like hedge fund managers don’t really care about the actual dollar value for a single share of stock, individual investorsare much more concerned.
For some reason, it seems better to own 100 shares of a $100 stock than 25 shares of a $400 stock — even though they both add up to a $10,000 investment in the same company.
Moreover, in today’s high-tech investment environment, individual investors can now own fractional shares. So even if a stock trades for an extremely high price — like Alphabet Inc.’s $1,500 share price — investors can still buy a third of a share for $500.
So again, it doesn’t really matter what a specific share price is.
Still, individual investors generally like to own lower-priced stocks.
And that’s especially important in today’s coronavirus market. Because according to a study by Citadel Securities, individual investors are a bigger part of today’s market than normal!
The study shows that individual investors now make up about 25% of stock market activity, compared with just 10% of activity last year.
So it’s important to at least consider what individual investors may be doing when making decisions about where to invest your retirement funds.
The Real Reason to Invest In AAPL
I love the idea of investing in AAPL.
But my reasons for owning the stock go far beyond the company’s stock split.
Apple has been a major winner during the coronavirus crisis and is a big beneficiary of the “work from home” trend.
As more employees dial in from home, Apple is seeing a big pickup in sales of MacBooks and iPads. That’s bringing in a lot of revenue for today, and it’s also setting up more reliable earnings for the future!
After all, Apple is working hard to transition from being a company driven primarily by product sales to one that profits from services like subscriptions.
But products still help to drive the new side of AAPL’s business.
After all, the more iPads in use around the world… the more App Store sales grow… the more Apple TV+ subscriptions start… the more service revenue will grow in general.
Over the past few years shares of AAPL have had an amazing run.
The company is actually the top performer in my Lifetime Income Reportdividend stock letter. And I still think AAPL has a lot of room to run.
Still, with the stock up sharply following the stock split announcement, it pays to be a little bit cautious.
If you’re just starting a position in AAPL, you may want to consider buying a few shares now but also look for a chance to buy a few shares later if the stock pulls back.
That way you can still profit if AAPL runs ahead, and you have an opportunity to take advantage of any temporary pullback along the way.
Over time, I expect AAPL’s share price to rise and the company’s dividend to increase. And all of that ties back to the company’s excellent business — not to the stock split announced last month.
Here’s to living a rich and rewarding retirement!