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The case for an Apple stock split redux

David Winograd

Just about a year ago I wrote a post explaining all the hoopla over an expected AAPL stock split which never happened. At that point AAPL shares were trading at $202.86 and many felt that it was just too expensive for most small investors to buy.

Last week, Apple closed at $348.14 after a few weeks of a roller coaster ride taking the stock down from a 52 week high of $364.90. No one really knows why the fairly quick drop happened. Rumors covered everything from the health of Steve Jobs and the question of a succession plan, to delays of the iPhone 5 and the iPad 2; but the fact of the matter is that an annual increase in price of around $145 ain't chopped liver.

The vast majority of AAPL stockholders are investment firms, with the little guy being mostly left out due to the high stock price. It's emotionally unsatisfying to buy a handful of shares, and with only five or six shares in your portfolio the profit potential is decreased. That's mostly emotions talking, but the market is strongly influenced by emotions like fear, excitement and greed. So what would happen if Apple decided to split its stock anywhere from two to one, up to a four to one split?

AAPL has split two for one three times, in 1987, 2000, and 2005 -- but it hasn't happened in the last six years. Philip Elmer-DeWitt writing for Fortune's Apple 2.0 posed an argument asking if the time is right. He made a reasoned case both for and against splitting.

Splitting the stock will allow the shareholder base to expand, with more smaller investors (less likely to short the stock or trade in options) and possibly more rational trading if the large institutions hold a smaller percentage of the stock. A split AAPL with a lower price might also make it easier to add Apple to the key Dow Jones Industrial Average stock index (DJIA). On the flip side, a larger number of shares outstanding may raise trading costs for the big AAPL holders, and maybe there's some psychological value to having a premium Berkshire Hathaway-esque price attached to Apple shares.

A major reason for other companies to deliver a stock split is that it provides the kind of publicity that just can't be bought. Apple, however, seems to have all the publicity it can handle these days. A more pertinent argument is that a study was undertaken of stocks that split anywhere from two for one, up to four for one during the years 1990-1997 using companies whose stock didn't split as a control group. The results showed that after one year, the split stocks increased over the control group by eight percent and over the following three years that number increased to twelve percent. That to me is pretty compelling -- but the counter to that argument is easy to spot, as Apple is managing better price growth organically just by creating must-have products and delivering pinpoint operational execution.

One year later, I've got the same message: I am calling for AAPL stock to split and split big. It will even out trading swings caused by the price manipulation of large investment firms, and with the shares at lower cost it will bring more people into the pool. The reasons against don't seem nearly as strong as the reasons for a split.

And once again, I don't think it will happen.

Note: The author is an AAPL shareholder.

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