Apple is splitting its stock at the end of the month.
We can’t help but think the move feels a little old-fashioned. Like slap bracelets, Starter jackets, and Beanie Babies old-fashioned. Stock splits were all the rage in the 1990s and early 2000s, but they’ve gone out of style since then with the growing popularity of new-age investment options and stock price bravado. Yet one of the world’s most valuable and innovative technology companies is using one of the oldest moves in the book to make its stock more affordable for the everyday investor.
Sure, 90s fashion may be coming back, but is this a new stock market fad or a trend that is here to stay?
What’s a stock split?
Let’s talk about stock splits. A stock split is exactly what it sounds like: A company takes its available shares and splits them into two (or three, or four, etc.). The number of shares you own increases and the price of the stock decreases, but the total value of your investment stays the same.
Want to know if your stocks are splitting any time soon? Each week, we compile a running list of corporate actions, which includes stock splits. You can find it here.
For companies, a split can make sense when the stock’s price climbs so high that it seems unaffordable to the average investor. After all, the average cost of an S&P 500 company share is about $147. That’s not exactly affordable for everyone. Stock splits are a way to keep shares at a reasonable level without sacrificing market value.
Splits’ Sweet Returns
Splits have also translated into some sweet returns in the past. Since 1990, past and present S&P 500 members have announced about 1,800 stock splits. Over the following year, each stock that was split outperformed the S&P 500 an average of 15%.
It sounds like a home run, so why are stock splits largely a thing of the past? Basically, there are more choices an investor has besides buying a single stock these days. Exchange-traded funds (ETFs) and mutual funds, which allow you to buy or sell a bunch of different securities at once, have become extremely popular. They offer an easy way to gain exposure to some of the high-priced stocks for a much lower price. Stock option volumes have been on the rise for the same reason, and fractional shares are offered at some brokerages.
Stock splits have also become less effective as a share price booster in recent years, perhaps because of the trends listed here. Since 2010, split S&P 500 stocks have beaten the benchmark by about 8% on average in the 12 months after a split.
High-priced stocks have also become somewhat of a badge of honor these days. Just look at the FAANG stocks: No company in that crew (Facebook, Apple, Amazon, Netflix, Google) has a stock price below $200.
Why is Apple splitting its stock?
Back to Apple. In Apple’s July 30 earnings call, chief financial officer Luca Maestri said the split would make the stock “more accessible to a broader base of investors.” It’s an understandable argument: Apple’s share price has almost doubled since March to over $400.
Apple has a good track record with splits, too. Apple has split its stock four times since it went public (the August 31 split will be its fifth). Apple outperformed the S&P 500 in the year after three out of four of these splits. The only time it didn’t was after its June 2001 stock split, and 2001 was a particularly rough year for technology stocks in general.
Fun fact: if you held one share of Apple stock at the beginning of 1987 and didn’t buy or sell any part of your position, you’d have 224 shares of Apple as of August 31.
Apple and the Dow
Apple’s split won’t just impact its share price. It’ll likely have broader implications for the Dow Jones Industrial Average and the mutual funds or ETFs that track that index. The Dow is a price-weighted index, meaning it calculates the weight of each of its members by their share prices (not their market values, like most major benchmarks). That means if Apple’s split divides its share price by four, Apple’s weight in the Dow could fall to about 3% (from 11%). In other words, the index’s performance may have to rely more on other stocks going forward.
What should I do?
If you’re an Apple shareholder, don’t be shocked if you check your brokerage account on August 31 and see that you own four times as many shares at a lower price. That’s the stock split in action. In a vacuum, a split doesn’t change the value of your investment, but it could make the stock more appealing to more investors.
It’s tough to say if this is the start of a new stock split fad. Only Netflix followed Apple’s lead last time, enacting a 7-for-1 split in July 2015. But we’re living in what could be a new golden age of the individual investor. A little support from companies with expensive stocks could be a big win for those wanting a bite of the Apple (and other big tech/high priced stocks).
Maybe the 90s really are coming back.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.