Apple stuns world with rare SEVEN-way split: What does that mean?
The price of a single share will drop by almost 86%
Apple surprised Wall Street on Wednesday by announcing the most aggressive stock split in its history – and just a month after Google executed its first-ever split.
The iPhone maker's seven-for-one split, due to take place on June 6, will see the fruity firm issue six new shares of common stock for each share currently in existence.
This will be the fourth stock split since Apple incorporated in 1980, and the most unusual. The previous splits – in 1987, 2000, and 2005, respectively – were all of the more typical two-for-one variety.
Stock splits don't change the value of investors' holdings. What they do, however, is adjust the price of an individual share of the stock – in this case, dramatically.
Once the split takes effect, the price of each Apple share will be divided by seven. So if a single share of Cupertinian stock was trading for $525 on June 5 (as it was as of the closing bell on Wednesday), the following day it would trade for $75, along with six new, identical siblings.
To put that into perspective, Apple currently has a market capitalization of around $468bn. That means that at its current trading price, one share of fruity stock is worth about one 891-millionth of Apple's business. Post-split, the value of one share goes down to one 6.2-billionth.
During an earnings call with investors, CEO Tim Cook said the reasoning behind the move was "to make Apple stock more accessible to a larger number of investors."
That sounds sensible enough. And yet some prevailing wisdom – most famously the opinion of billionaire Berkshire Hathaway kingpin Warren Buffett – suggests that stock splits can hurt companies, because a lower share price invites short-term investors who trade shares more frequently, increasing their volatility.
One company that shares Buffett's opinion is Apple's archrival, Google. In 2008, the advertising giant's then-CEO Eric Schmidt told CNBC that he liked to keep the stock price high and there were no plans for a split.
At the time, Google shares were trading for around $235. By the time its stock actually did split earlier this month, a single share was worth almost $1,200. And Google only split its shares two-for-one, leaving them plenty pricey.
Whatever Cupertino's motive for slashing its share price, however, there was some additional, immediate good news for shareholders during Wednesday's earnings report. The fruity firm announced that it would pay a dividend of $3.29 per common share on May 15 (before the stock split), an increase of 8 per cent.
In addition, Apple said it is upping the amount it will spend on share repurchases from $60bn to $90bn – a move that's sure to please so-called activist investor Carl Icahn, who has been pestering Cook to be even more aggressive with the buybacks.
As for the split, although current investors will be issued their new shares on Friday, June 6, Apple's stock won't officially begin trading at its new, lower price until the following Monday, June 9. ®