Monday, November 30 , 2015, 10:17 am | Fair 62º

Craig Allen: Will Apple Stock Split Mean More Upside for Investors?

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

Apple’s 7-for-1 split Sunday brought its share price down from Friday’s close of $645.70 to about $92.24 per share. For current shareholders, nothing really changes — they still own the same dollar amount of Apple that they owned Friday — but they now own seven times as many shares of the stock.

On a go-forward basis, is this stock split good or bad for investors?

Generally, companies split their stock when the price per share rises to a point at which smaller investors can no longer afford to buy a reasonable number of shares, and therefore cannot buy the stock. This means that small investors, if they want to own a company like Apple (before the split), must indirectly buy it through an ETF or mutual fund. By splitting their stock, companies bring the price back down to a more affordable price point, once again making it available for direct investment by smaller investors.

Whether stock splits result in improved stock performance is open for debate. From a practical perspective, there is no way to judge this because, once the stock has been split, the company no longer trades at the pre-split price, so there is no way to directly compare pre-split performance with post-split performance. It would seem that stock splits were likely more effective in terms of driving improved stock performance in the past, before smaller investors had alternative ways to purchase higher priced shares.

Today, with so many mutual funds and other investment vehicles designed to allow smaller investors to participate, I would argue that the value of stock splits is significantly diminished. Still, there certainly can be a short-term psychological, positive impact on the price of the stock immediately following a split, especially one of the magnitude of Apple’s 7-for-1 split.

In the longer term, the potential for stocks, post-split, to perform well is typically more a result of the fundamentals of the company — and the economic environment within which the split occurs — rather than a result simply of the split. In Apple’s case, the stock has made a significant run since Carl Icahn began buying the stock and strong-arming the board to release some of the massive cash position that has been accumulating on Apple’s balance sheet for years. With a combination of dividends to shareholders and stock buy-backs, and the positive media surrounding Icahn’s involvement, Apple shares rebounded to the current nearly $650 per share (pre-split) from below $400, or by about 65 percent.

As of Friday’s close, Apple shares are now within about 9 percent of the all-time high of $705 set in September 2012, although they have yet to reach this milestone. This is interesting, since the Standard & Poor’s 500 and Dow Jones Industrial Average have set multiple new, all-time highs this year.

From a valuation standpoint, Apple is trading at about 16X trailing earnings and about 13X expected future earnings, while the S&P 500 is trading at about 19.5X trailing earnings, and at about 15.5X future earnings. Therefore, on a trailing basis, Apple is trading at a discount of about 18 percent to the S&P 500, and at a discount of about 16 percent.

Does this mean Apple is undervalued? Not necessarily.

If you believe that the stock market is undervalued, or fairly valued, then you could make the argument that Apple’s shares are undervalued. If, however, like me you believe that the stock market is grossly overvalued, Apple, even though at a discount to the broader market, would still appear to be at least fully valued if not overvalued.

If the stock market is overvalued, does this mean that the market, or Apple shares, will plummet tomorrow? Not necessarily.

Markets, and stocks, can stay overvalued for days, weeks, months and even years. They can continue to drive higher even after being overvalued for an extended time frame, (which is what I believe is happening with the market and with Apple).

Apple faces some tremendous challenges, not the least of which is its less than impressive pipeline of new products and the inevitable exit of Icahn (he is not a long-term investor). Even if Apple does everything right, and knocks the cover off the ball from a new product development and release standpoint, and even if Icahn stays indefinitely, Apple will be very unlikely to be able to fight the ebbing tide, should we experience a significant stock market correction or crash.

Yes, I know, I have been talking about a correction or crash for several months and I sound like a broken record. However, we are more than five years into this bull market. The last two bull markets that lasted more than five years ended in the 1987 crash, and the 2008-2009 financial crisis (which resulted in the S&P 500 collapsing from a high of 1,565 to a low (intraday) of 666, or by 57 percent.

It is not logical to expect the stock market to continue rising to new, all-time highs forever, and for valuations to continue to extend ever higher. At some point, at a minimum, the stock market must take a breather. In my 25+ years of experience working in the financial markets, I have never seen a market get this extended when it was not followed by — at minimum — a significant correction.

Only time will tell if Apple’s decision to split the stock will attract more small investors to buy their shares. Monday’s trading, if positive, may at least signal the short-term impact of the split on the shares.

If Apple’s stock price rallies, it will at least send a signal that investors believe the split to be a positive for the company. In the longer term, the performance of Apple’s shares, as with all stocks, will depend, in large part, on the performance of the U.S. economy.

Craig Allen, CFA, CFP, CIMA, is president of Allen Wealth Management and founder of Dump That Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.

comments powered by Disqus

Support Noozhawk Today

You are an important ally in our mission to deliver clear, objective, high-quality professional news reporting for Santa Barbara, Goleta and the rest of Santa Barbara County. Join the Hawks Club today to help keep Noozhawk soaring.

We offer four membership levels: $5 a month, $10 a month, $25 a month or $1 a week. Payments can be made through PayPal below, or click here for information on recurring credit-card payments.

Thank you for your vital support.


Daily Noozhawk

Subscribe to Noozhawk's A.M. Report, our free e-Bulletin sent out every day at 4:15 a.m. with Noozhawk's top stories, hand-picked by the editors.