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Why Apple’s Stock-Split Is a Smart Move?

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Don’t Listen To Me, But Please, Hear Me Out: # 14

Aug 5 2020

Apple Computer, 1992

I’ve loved Apple products since I first walked into the computer lab as an undergrad.

Last week 2 Major events helped Apple end the news cycle on a high.

1. The Big Tech Antitrust Congress Hearing

On Wednesday, July 29, US Lawmakers grilled 4 CEO’s of Big Tech companies for nearly 6 hours. Jeff Bezos for Amazon, Sundar Pichai for Google, Mark Zuckerberg for Facebook and Tim Cook for Apple sat patiently, sometimes answering tech support questions from law makers. I enjoyed quite a few chuckles.

 “Well, it was my father who is not receiving now my campaign emails. So clearly that familial thing you’re talking about didn’t apply to my emails,” 

Greg Steube (R-FL) complaining why Google is sending his campaign emails to his father’s spam folder. He was conflating his personal emails with those of his political campaign’s.

It was the most entertaining live stream event I have watched in many years. I believe Apple came out with very little damage. Apple is a platform for people who love Apple, value their privacy and are fanatical about the product. It will be hard for regulators to win an antitrust case against Apple, because they have prove that Apple engages in predatory pricing that hurts consumers. Although developers argue that a 30% fee Apple charges for in-app purchases is predatory, yet, I do not agree. In fact Uber, Deliveroo etc., charge their customers (Drivers, Restaurants), 20%-30% to participate in their respective apps. Apple charges 30% for the first year and then the fees decline of the following years.

Moreover, consumers are happy to pay the premiums for Apple products and services as was clear from the excellent earnings Apple reported last Thursday.

2. Apple Reports 3rd Quarter Earnings

Apple rewarded its retail customers and announced a 4-to-1 Stock split.

What’s a stock split?

When a company announces a 2-for-1 stock split, it means that each shareholder will now own 2 shares for every 1 share they owned before the announcement. This does not change the value or market cap of the company and therefore neither does it change the value of the stock in the shareholder’s portfolio.

Let’s say ABC Inc’s stock was trading at $100 per share on July 31 and they announced a 2-for-1 stock split. Let’s say you owned 50 shares on July 31. 

Value of ABC stock in your portfolio = 50 X $100 = $5,000

After the split, 

Number of ABC shares in your portfolio = 2 X 50 = 100

Price per share = $100/2 = $50

Value of ABC stock in your portfolio = 100 X $50 = $5,000

There were 2 main reasons for stock-splits and both are not as relevant anymore.

  1. Until about a year ago, brokers and platforms charged commissions to execute stock purchase orders. To reduce the commission per share, you’d have to buy shares in lots of 100. For example, $AMZN is trading above $3,000 per share. An average investor cannot come up with $300,000. They may be only able to buy a few shares and therefore would be forced to pay higher commissions. So, to enable average retail investors to invest, companies would do stock splits to make sure their stock traded around mid 2-digit figures. This is not relevant anymore as most trading platforms now have zero commission for trading stocks. 
  2. Companies would announce stock-splits to encourage retail investors to buy their stock, so that they have a vested interest in seeing the company do well. Again, it is hard for an average retail investor to pony up with $30,000/- to buy even 10 Amazon shares. Splits would decrease the share price so that more retail investors can participate and proudly say they own AMZN shares. This may not be as relevant today because platforms like Etoro, Robinhood, Schwab etc., now allow investors to purchase partial shares. For example, you could now purchase 1/10th of 1 share of AMAZON for $300.
Abdul Hadi, my nephew, a budding artist
drew this on his iPad

If stock splits do not have much relevancy today, why did Apple announce a big stock-split when Google (~$1,400), AMZN (~$3,100), TESLA (~$1,400) etc, trading in 4-digits don’t do splits?

Personally, I think it’s a smart move. Apple is focused on retail customers. Apple’s customers are fanatical about Apple and it’s a great way to build loyalty if your customers are also investing in your company. The utility for any Apple product is great and together, the Apple product suite and services provide tremendous value to every user. My nephew is a budding artist (instagram: @alien.art7) and does amazing work with his iPad.

Now if you own Apple shares, and you love Apple products, then Apple has just raised the switching cost. Because, if you now switch and buy Samsung or Google phone, you are essentially hurting your own investment. So, rationally you won’t switch.

It is human psychology that when you look at something that trades at $100 vs $400, you think, “oh wow now it’s cheaper, I can afford that”, even though in the case of a stock-split, the market cap or value of the company has not changed. Apple’s stock-split is therefore smart because when the price of a share drops from $425 to about a $106, people will think they can afford it.  Apple will attract more buyers of its stock fueling demand and thus, stock price will also move up increasing Apple’s market cap. After the earnings call announcing the stock-split, Apple added $95 Billion to its market cap. Win-Win-Win. How much has Apple won for its shareholders? Let’s look at Apple in numbers.

Apple in Numbers

Should you buy Apple now? Let’s quickly look at some of the ratios and trends I talked about in previous blogs, here, and here. You can read Apple’s latest Financial Reports here.

  • P/E: 32.24, Apple is expensive compared to the S&P 500 Index P/E which is around 24.
  • Beta: 1.18, Apple is a little riskier than the market
  • EPS: $2.58 up 18% compared to Q3 2019 and this is brilliant as Apple increased Net Income to $11.25 Billion despite the pandemic.
  • Gross Margin is 38.00%, a slight increase from 37.59% in Q3, 2019. Gross Margins on products were slightly down, but Gross Margins on services were up.
  • FCF: $35 Billion in Free Cash Flow is great but it is down compared to $52 Billion Q3, 2019.
  • Cash & Marketable Securities: $93 Billion
  • Retained Earnings: $24 Billion is also good but is down compared to $53.7 Billion in Q3 2019.
  • Debt to Asset Ratio: 38.5%

Apple has a healthy balance sheet.

Analysts have written off Apple many times predicting that it is no longer a growth company. As you can see in the table below, Apple grew every line of its business, including iPhones, although more modestly than other segments as shown in the table below.

Q3 2020 Net Sales By Category. Source: Apple.com

Interestingly, it grew in every region it operates in. 60% of its revenues are from international sales.

Apple Stock Returns

Apple IPO’d on Dec 12, 1980. If you had invested $1,000 then, your stock would be worth over $1 Million as on July 31, 2020. If only we had a time machine, right? This is how Apple throws shade on analysts who are always predicting it’s demise. Apple stock gains as on July 31 2020 when compared to market indexes, DJIA and S&P 500

Apple stock gains as on July 31 2020 when compared to market indexes, DJIA and S&P 500

The chart above shows Apple’s stock returns YTD, 1-year, 3-year, 5-year, 10-year, 30 year and Since its IPO going back from July 31, 2020. S&P 500 is flat YTD and DJIA (Down Jones Industrial Average), is down -8% whereas Apple is up a whopping 77%. 

Put another way, had you invested $1,000 on particular dates, your ROI or investments as on July 31, 2020, would be as follows:

Apple stock gains as on July 31 2020, on an initial investment of $1,000

Apple’s 10-year returns on a $1,000 investment, compared to that of DJIA and S&P 500 is visibly striking in the chart below.

Apple stock gains as On July 31 2020, on an initial investment of $1,000, compared to market indexes DJIA and S&P 500

Conclusions

  • It is very hard to predict the growth or demise of a company or the extent to which a stock price may increase or decrease.
  • However, so long as the company has great leadership, great products, services and not only a growing but a cult-like customer base, a company should grow reasonably well.
  • Apple’s early years were quite rough. However, since Steve Jobs returned to Apple in 1996, it has had very few rough years. In 2000, 2002, 2008, 2015, Apple stock price was down when comparing the year opening price and year end closing price. This includes the dot com crash, the 2008 financial crisis and in 2015, there were fears that iPhone sales had peaked and Apple had no new break away product to replace the iphone. Tim Cook took over as CEO in 2011 and has steered Apple very well indeed.
  • Apple warned that they have a lot of litigations against them that are continuing.
  • Past performance does not guarantee future returns.
  • I will probably hold my Apple stock for a long time to come.

I’m not a certified financial advisor, I am sharing my experience investing for over 20 years. If you would like to reach me, you can find me on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say@shaheedasays.com.

Disclaimer:

I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.

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Shaheeda Abdul Kader

After 25 years of working for corporations, being an entrepreneur and managing investments for my family, I now want to help others find their financial freedom