Tags: Apple | stock | split | earnings

What Apple's Stock Split Really Means . . . Nothing Has Changed

By    |   Monday, 09 June 2014 08:14 AM

Retail investors love stock splits. New investors to the stock love being able to buy the stock at a much cheaper price. And current investors love it that they're going to get many more shares in the company.

However, here's what they don't realize. Stock splits don't change the fundamental value of the company at all. For instance, let's take Apple's 7-for-1 stock split.

Let's say you owned 100 shares of Apple's stock Friday. After the split Monday, you'll own 700 shares. Before the split, the price was around $645. After the split, the price will be somewhere around $92 (seven times less). But what changed fundamentally? Nothing!

Picture a pizza. I can take a pizza and cut it into the eight traditional pieces or I could cut the very same pizza into 56 pieces and it's still the same pizza. There are more slices, but the slices are much smaller.

That's all you've got happening with Apple's stock. Now novices will say, "Yes, but when it goes up a dollar per share now, it will gain me $700 rather than $100." But what they're not considering is that there is also a sevenfold increase in the number of shares outstanding too. So it takes a ton more buying now to make the stock go up like it did before.

So splits do nothing for a stock. Yet, other novices will say that they do. They'll say that more people will buy the stock at $92 per share than they would at $645. But remember, this stock has made it to $700 before just fine and it didn't take a split to get it there.

Google got to $1,000 before it split. And Berkshire Hathaway has never split and it's $192,895. No, that's not a typographical error. That's the actual stock price. The stock has never been split and yet it has gone up just fine through the years. In fact, it's gone up far greater than the S&P 500 has . . . and without the need for a split.

Now, I'll tell you what DOES make a difference fundamentally that Apple is doing. They continue to increase their share buyback program. So as they do that, that will soak up some of the shares outstanding and help it to earn more money per share and make each share worth more in time.

Apple also continues to increase its dividend, and that actually attracts more of the "big money" that longs for yield. Also, Apple's dividend is likely the safest dividend on the planet. Why? Apple has more cash on its books than any other company that I can find in the entire world. It has almost $150 billion in cash on its books. So I think that its can easily support the present dividend along with any increases in the future.

The big money knows this and so any increase in Apple's dividend is a big deal because it's as close to a guaranteed/riskless dividend that you can get.

But with all of this said, I wouldn't buy Apple because of a stock split coming or a stock split that's already happened. It simply doesn't change the fundamental value of the actual company at all.

If anything, investors ran up the stock upon the announcement of the stock split. That's why we just cashed out of Apple once again. We made 23 percent in approximately 90 days. Before that, we made more than 37 percent in six months. So within the last 12 months, we've made 60 percent on Apple in the Ultimate Wealth Report.

Everyone is in love with Apple once again, so we're out of it. But if Apple should have another sizable pullback like in the past, then we may re-enter it then, when the sentiment for the stock has soured once again.

By the way, for those who think that a high-priced stock can't appreciate well, tell that to Apple's stock, which has appreciated almost 45 percent during the past 12 months.

How cheap or how expensive a stock is, per share, has nothing to do with how much it can go up.

Always look to see if the stock is cheap relative to its earnings (which is found in its price-earnings ratio). And look to see if it's a great company. I'd rather buy a great company that appears to be expensive per share, but is cheap relative to its earnings than to buy a bad company that is cheap per share but is shaky fundamentally.

You don't have to take huge risks to make huge gains. We just bought and sold (twice) the company that's got more cash on its books than any company in the world and made 60 percent on it inside of 12 months.

So I hope I've helped to shatter a bunch of misconceptions that people have about stocks.

If you've learned anything from this article, learn not to care about stock splits. Don't buy or not buy because of a split. That's basically a gimmick and only novice investors think they're getting something for nothing out of it.

Buy because the company is solid and the price of the stock is cheap relative to its earnings.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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Retail investors love stock splits. New investors to the stock love being able to buy the stock at a much cheaper price. And current investors love it that they're going to get many more shares in the company.
Apple, stock, split, earnings
Monday, 09 June 2014 08:14 AM
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