If you split an apple four ways, it might not keep the doctor away longer. But splitting an Apple four ways certainly has the potential to make your portfolio healthier.
The maker of iPhones and other tech wizardry has announced it will split each share into four, a move that certainly excites Wall Street, if Apple’s (AAPL) 10.5%, one-day move on the news is any indication.
To the perennial cynic, such a move in price is superficial nonsense. Splitting a stock should mean nothing since one share of Apple at $400 is no different than four shares at $100 apiece.
While mathematically true, the Street thrives on emotion and perception as much as it does on cold, sterile mathematical reality. Moreover, academic research says that a stock split is good for the wallet.
Various studies over the years have shown that stocks tend to drift higher for as long as three years after undergoing a stock split. Not only do they drift higher, they tend to outperform the market as a whole. One of the deepest studies I know of is a bit dated – from 2003, looking at all stocks that split 2-for-1, 3-for-1 and 4-for-1 between 1990 and 1997. It demonstrated that stock-splits outperformed the market by 8%, on average, in the year following the split, and by 12% over the three subsequent years.
That study came from a finance professor I often chatted with named David Ikenberry, now at the University of Colorado. I knew him back in his days at Rice University, where he conducted his initial research on all 1,275 stocks that underwent 2-for-1 splits between 1975 and 1990. That research is pretty much identical to his 2003 work (split shares were up 8%, on average, after one year; 16% after three years).
And if you think about it from an emotional viewpoint, rather than mathematical, there’s some logic to this. Companies that split their shares have usually seen their stock price rise sharply over several years because that company’s operations are fundamentally excellent. Splitting the shares simply makes a nominally expensive, well-run company more affordable, which, in turn, draws in more buyers … which increases demand for the shares … which drives the share price higher.
After all, there are fewer individual investors willing to pony up $400 for one share of Apple. There are many more who’ll pay $100.
Looking past the split, it’s saying absolutely nothing revelatory to state that Apple remains one of the best momentum plays on the Street right now. Apple is going into “New iPhone Season” in a few weeks as it prepares to launch the upcoming 5G-compatible iPhone 12. And the company remains a profitability monster: profits margins exceeding 21%, ROA at nearly 18%, ROE at a stratospheric 73%.
Granted, revenue growth has been tepid, but iPhone 12 excitement could see that ramp up (dependent, of course, on the progression of the Covid virus heading into the fall and winter).
That said, Apple’s outsized profitability, its momentum characteristics, and now a stock split that bodes well for the future likely mean Wall Street’s favorite fruit is a good pick on weakness. Just let the stock-split giddiness wane a bit – and it will – before wading into the orchard.