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With Apple (AAPL) stock trading above $500, an investor at the company’s annual shareholder meeting on Feb. 23 asked Chief Executive Officer Tim Cook about the pros and cons of a stock split. Cook said the board considered a stock split and determined that in most cases, splits “do nothing” for shareholders.
That’s a new take for Apple, which has split its stock three times, most recently in 2005. Companies often split their stock when share prices get high—Apple instituted a 2-to-1 split in 2005, when its shares were about $80—to bring them down to levels more accessible to individual investors. Many investors like splits, viewing them as a sign of management’s confidence in the company’s future.
One CEO famous for shunning splits is Warren Buffett, who tries to discourage short-term trading in Berkshire Hathaway (BRK/A) shares, saying he wants shareholders to view themselves as “owners” who will hold their stake for the long haul. The shares now go for $120,000. But Buffett has had to bow to investor demand for affordable shares. In 1996 the company created a new share class, B shares, worth 1/30 of the A shares. In 2010 it split the B shares 50-to-1. They now trade at about $80.
Splits don’t have any impact on a company’s total value. After a 2-for-1 split, for example, a company would have twice the number of shares at half the price. Academics say stock splits don’t help investors. “Stock splits are empty gestures,” says Aswath Damodaran, a finance professor at NYU’s Stern School of Business. He says lowering stock prices can enlarge the pool of potential investors; with more investors bidding for a stock, the price can go up. Still, he says, any such effect is “overwhelmed” by the increased transaction costs of buying a lower-priced stock because the spread between the bid and ask prices represents a larger percentage of the stock price. Indeed, after stocks split, professional investors are more likely to sell, while unsophisticated individual investors are more likely to buy, according to research from the Yale School of Management.
So investors with $500 can buy an iPad or a share of Apple itself. But for those with only $50, their only option is an iPod shuffle.