Apple just announced a stock split — here's what that means for investors

by 24USATVJuly 31, 2020, 4 a.m. 23
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During its third quarter earnings results on Thursday Apple said that the company's Board of Directors approved a four-for-one stock split.

Stock splits are cosmetic, meaning they do not change anything about a company's underlying fundamentals. They can lead to renewed interest from smaller investors by making the shares — which are now cheaper — more accessible. But that interest would not be enough to influence the share price more so than larger investors already freely trading the stock.

In this case, all investors who currently own the stock will receive three additional shares after the market closes on August 24. With Apple's shares trading around $400 in the after hours, the new price for holders will be around $100 when it begins trading on a split-adjusted basis on August 31.

Apple's move is not uncommon, and the company has enacted stock splits in the past. The tech giant's most recent split came in 2014, which enabled it for consideration and ultimately addition to the Dow Jones Industrial Average.

The 30-stock index is price-weighted, meaning that the impact of a company's change in share price is determined by how much shares trade for. Apple is currently the highest priced stock in the index, which may have influenced the company's decision to split its shares.

Apple said in the release it approved the split to make "the stock more accessible to a broader base of investors."

Stock splits have sometimes gotten a bad reputation given that shares can spike on the news, even though the company hasn't announced a meaningful change.

During the tech bubble, for instance, a number of companies enacted stock splits, which fueled rampant speculation and drove up shares without the earnings growth to back up the price. Many investors lately have feared tech shares may be running too far ahead of their fundamentals like they did during that speculative time.

Warren Buffett's Berkshire Hathaway has famously never split the price of its main A shares, which currently trade around $291,362.

"I think most people think that the stock would sell for more money split. We wouldn't necessarily think that was advisable in the first place," he said at the company's annual meeting in 1994.

"In the second place, we don't think it would necessarily be true over a period of time. We think our stock is more likely to be rationally priced over time following the present policies than if we were to split it in some major way. And we don't think the average price would necessarily be higher. We think that the volatility would probably be somewhat greater, and we see no way that volatility helps our shareholders as a group," he added.

Buffett has, however, split the price of the Berkshire B shares.

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