Posted by on April 30, 2014

Is Apple AAPL once again ahead of the curve?

Last week during their quarterly earnings call, Apple management announced plans for a 7 for 1 stock split. This means for each share of Apple stock held by investors the company will grant 6 additional shares.

Remember, stock splits do not change the market capitalization of the company nor do they change the value of existing shareholders’ positions. Following the split, shareholders will have 7x the number of shares but at 1/7th the current share price.

The split will be effective on June 9th. This means that the shares will begin trading at the 1/7th price point (around 85 dollars) on this day.

Prior to 2000, stock splits were relatively common, and even in the years since the millennium, we still saw a fair number of appreciated stocks in the S&P 500 index split their shares. The reason I title this with the question is because stock splits have become passé since the 2008-2009 financial crisis. And I just wonder if Apple’s move, following Google’s 100% stock distribution, might bring the stock split back into financial fashion.

One primary reason companies used to split their share price was to broaden their investor base. Typically splits only occurred in stocks with appreciated share prices. Many corporate boards wanted to make sure that the higher price was not too expensive for ordinary retail investors to be able to afford ownership. It follows that this is particularly important for consumer brand names. Loyal shareholders are loyal customers as well, would be the idea.

The market in the past 3 years has rewarded stock splits as well. This makes no sense whatsoever to a numbers based investor. Remember, the split doesn’t change anything from a market cap perspective. However, making the shares more affordable may increase the potential investor community to include small retail which would increase the demand for the shares, which according to supply and demand should push the price higher.

Also there may be a positive message being sent to all investors by the management of the company who announces a stock split. Although splits usually occur in appreciated stocks, you wouldn’t expect a management board to split the shares if they were worried about an immediate retracement in the price. Splits have been described as an “all clear” indicator from the company.

So will other high priced companies follow Apple’s lead and split their appreciated shares? Will stock splits become “cool” once again? Another potential positive impact if more companies split their share prices could be increased trading volumes. More volume could lead to tighter bid/ask spreads, the price difference between the bid and offer prices that this extra liquidity could bring.

Other reminders about splits:

  1. Like many corporate actions, any unfilled GTC orders will be canceled on the evening prior to the day the split becomes effective. Again the effective date for the Apple split is Monday, June 9, 2014.
  2. The Options Clearing Corp (OCC) has released a memo describing the changes to the strike prices. If you were long 1 call contract struck at 550, you will now own 7 contracts struck at 78.57. Exercising each contract would deliver 100 shares at a cost of 7867. If you exercised all 7 contracts you would own 700 shares for a cost of 78.57(new strike) x 100(multiplier) x 7(contracts) = $54,999.

    Mini contracts will undergo the same adjustment. For each mini currently owned you will have 7 mini options, each delivering 10 Apple shares.

  3. Lastly, we don’t expect to see new mini options contracts listed on Apple post-split shares.

The above information is provided by OptionsHouse, LLC ("OptionsHouse") for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

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