Apple did the unimaginable. It split its stock 4-for-1. The shares soared after the announcement, with much of the credit correctly going to its stellar earnings report. However the press was surprised and bemused by the split: It’s just not something the tech darlings do, and it was unexpected. What could have been going through the Cook contingent’s mind? Why the 4-for-1 division?
Recall that stock splits were once common and big news. Prices soared when companies split their shares. It was illogical on the one hand, simply more pieces of the same pie, but the corporate propensity to divide the equity into a larger number of slices was powerful for many years. As trading became more institutionally dominated, however, the opposite became fashionable. The higher the stock price, the more prestigious the company. Warren Buffett never split Berkshire Hathaway, and neither have other dominant companies in the last decade. Stock splits increased steadily from the 1920s to 1982’s peak of 23%. However the frequency has dropped precipitously since then to less than 1%. So what was Apple thinking?
On the one hand, the decline in the frequency of splits is rational. It represents the indifference of institutional investors to the dollar price of a stock, reduced public participation in the markets and, especially, the instant diversification provided by ETFs and mutual funds. Households don’t need to buy a bunch of individual stocks to diversify their portfolios and hence are indifferent to absolute price per share. And, again, stock splits are nothing but cutting the pie into more pieces.
But something new has entered the picture. First and foremost, the Robinhooders are a larger part of trading than was true a year or so ago. Retail volume is now perhaps 15% of overall turnover, up from 10% a year ago. Thus it makes more sense to attract larger numbers of individual shareholders. Households have a psychological preference to owning more shares, not fewer. Note for example how they recently piled into the penny stock of bankrupt Hertz and the proliferation of low priced stock chat boards in the work at home era.
Perhaps even more pertinent is the newfound appetite of governments to take on, and possibly to take down, the FANGy giants. Regulators and (publicity conscious) legislators see the big tech stocks as juicy targets. Broadening the “small guy/girl” shareholder base is therefore suddenly important to Apple and others like it. Grass roots investors can be a strong lobbying base.
Thus increasing individual investor ownership at a time of political and regulatory stress is a logical step. Apple breaking ranks with the Buffett disdain for splits makes sense.
In addition, the previous incarnation of stock splits contained another element of psychological value: Splits represent a means for managements to signal to the market that their companies have bright prospects, that their boards believe the shares are underpriced and that investors should look at them. It is a way to ring a bell, saying “we believe there is something here that is undervalued that you ought to investigate.” Splits can be an effective communication tool.
Broadening their household ownership ranks is a useful defense mechanism for the big tech companies who feel under governmental attack. The split is also an effective signaling device for other companies that think their shares are worth more, that their earnings are growing and their prices are irrationally low. Apple may lead others to follow suit.
George Ball is chief executive officer of Sanders Morris Harris.