Apple and Google Show That Stock Splits Are Cool Again

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Apple Reports Quarterly Earnings
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It seems as if tech darlings don't want to scare off potential investors with sticker shock. Last Wednesday Apple (AAPL) became the latest company with a hefty share price to declare a stock split, agreeing to exchange every single share for seven shares trading at a much lower price.

Stock splits are zero sum games. If an investor has 100 shares of Apple with the stock at $560 at the time of the 7-for-1 split, that investor would own 700 shares with a stock price of $80. But no matter how you slice it, the math still results in a $56,000 stake in the consumer tech giant. However, many think that there's a psychological benefit to having a stock appear to have a lower price.

Apple isn't alone. Google (GOOG) also recently completed what was in effect a 2-for-1 stock split by giving investors a new share of non-voting stock for every share that they owned at the time. With Apple and Google validating the practice, don't be surprised if more stocks with large share prices go this route.

A Split by Any Other Name

Apple executed 2-for-1 stock splits in 1987, 2000 and 2005. It was quick on the trigger whenever its stock approached high double digits or poked its head into triple digits.

However, the stock splits went away after that. Apple's stock continue to shoot higher as the iPod grew in popularity, followed by the introduction of the iPhone in 2007 and the iPad a few years later.

Why did the company alter its behavior? The best bet is that Google changed the game when it went public around the time of Apple's final stock split. Google wanted to go public at a price that was as high as $135 during the summer of 2004. It had to settle for $85, but the message was clear: Google wasn't going to try to cater to conventional whims where companies would perform pre-IPO splits in order to hit the market at more accessible prices between $10 and 30.

Google's reluctance to declare stock splits through nearly 10 years of trading let everyone know that it was in a race to hit the highest share price possible. It finally gave up the game a few weeks ago when it broke through the $1,000 ceiling, announcing a spinoff that was essentially a 2-for-1 stock split. Google's move now leaves just four stocks trading for more than $1,000 a share.

The Rise and Fall and Rise of Stock Splits

Stock splits were fashionable in the late 20th century. Retail investors were buying stocks in round lots of 100 shares at a time, and a company didn't want to limit its appeal. Individual investors who had just $20,000 to invest in a new stock would gravitate to 100 shares of a stock at $20 than to buy 20 shares of a stock at $100.

Even today, some investors argue that a stock price can be too high. Market cap is the product of a stock's price and the number of shares outstanding. The stock price on its own is immaterial. A stock can be expensive if it's overvalued relative to its fundamentals, but there's really no such thing as a share price that is too high on its own.

It's true that the greatest investor of our time is not a fan of stock splits. Warren Buffett has refused to declare a stock split on Berkshire Hathaway (BRK-A), though he reluctantly went on to offer a new class of shares (BRK-B) at a lower price several years ago. However, with the exception of a handful of successful companies, most companies don't like to see their prices get too high.

Now that Apple and Google are going for splits, expect that thin pool of high-priced stocks to follow suit. We're not back to the way things used to be, of course. Apple's will still price the stock at levels where it used to initiate its 2-for-1 splits, and Google's stock still carries the 11th higher price of all stocks in this country. (The top 10: Berkshire Hathaway, Seaboard (SEB), Priceline (PCLN), NVR (NVR), Altisource Asset Management (AAMC), Graham Holdings (GHC), Markel (MKL), Apple, White Mountains Insurance Group (WTM) and AutoZone (AZO).)

Then again, every trend has to start somewhere. Stock splits are back in fashion.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Apple and Google (C shares). Try any of our newsletter services free for 30 days.

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andrewview

vpco is stock to buy

May 03 2014 at 3:45 PM Report abuse +1 rate up rate down Reply