Apple Inc. (Nasdaq-GS: AAPL) just announced a historic 7-for-1 stock split that will drop the price of Apple shares from about $600 all the way down to about $86.
Just weeks before, search giant Google Inc. (Nasdaq-GS: GOOGL) unveiled a split of its own – a 2-for-1 reapportionment that halved the price of this “Thousand-Dollar Club” stock, meaning you can now snap up shares at a more-affordable $530 each.
While academics typically dismiss stock splits as “book-keeping” maneuvers that have little actual impact on the underlying profit opportunity, retail investors usually get pretty stoked when a “name-brand” stock announces a split.
Today I’ll explain why. And I’ll also show you how these two particular splits can give your investment portfolio a nice little additional jolt.
Over the last year, we’ve talked a lot about the difference between a stock’s sticker price and its value. As I have said many times, a high-priced stock that gains 50% is cheaper in the long run than a penny stock that gains only 20%.
Now, Google and Apple aren’t those kinds of high flyers, but they are quality stocks with rock-solid fundamentals. And that’s why I wanted to tell you about how these two tech stocks – two of my all-time favorites, in fact – will soon be available at sharply reduced prices.
The Google split is already finalized. And the Apple split will take effect on June 9 for shareholders of record as of June 2. So that makes this a timely discussion.
Before we talk more about the specifics of the Apple and Google transactions – and look at how they can help you – let’s first take a look at stock splits in general.
First, to be absolutely clear, a stock split does not affect the market cap of the stock or any of the metrics we typically use to analyze the stock.
For instance, say that XYZ Software Corp. has been trading at $100 a share, and then splits its stock 2 for 1. That means there are now twice as many shares of XYZ on the market, and they cost $50, not $100. Now, $5,000 buys you 100 shares instead of 50 shares.
You will have invested the same amount, but the entry price is much more attractive.
In essence, companies split their shares to boost the “liquidity” – Wall Street jargon for boosting the shares’ allure and increasing their tradability. Cutting the price down makes the stock more attractive to average investors who don’t have millions to throw around the way hedge-fund managers or high-frequency traders do.
And there is a tangible benefit – for the company, and for investors shrewd enough to move in and capitalize.
Packing a Punch
History shows that stock splits are an excellent deal for shareholders. Investors perceive that company executives are very bullish about the firm’s future, and often begin piling into the stock, increasing its return.
That’s just what business professor and noted market analyst David Ikenberry discovered. He did two studies on the stock splits covering 20 years’ worth of market data.
Ikenberry concluded that stocks that split beat the market by an average of 8% in the first year and at least 12% over the next three years.
That may not sound like much at first glance. But a 12% annual premium means you would double your returns compared to the overall market in just six years.
One interesting note from Ikenberry’s research: CEOs often announce splits at the same time as great earnings news, a fact that gives the stock an extra boost.
And both Google and Apple serve as cases in point.
Google initially announced its stock split back in April 2012 – at pretty much the same time it reported a 61% increase in quarterly earnings.
From the time of that announcement until the split actually occurred on April 3 of this year, Google’s share price zoomed nearly 80%. That’s just about double the return of the Standard & Poor’s 500 Index over the same period.
That’s a life-altering outperformance.
Then there’s Apple.
Like Google, the Cupertino-based iDevice maker unveiled its stock-split plan in conjunction with other good news. Indeed, Forbes said that Apple “delivered a trifecta of stock moving announcements – strong earnings, plans to return $130 billion in cash to investors and a 7-for-1 stock split.”
Apple’s shares – which closed at $524.75 on April 23 – recently eclipsed the $600-a-share mark for the first time since late 2012, a gain of 15% just two weeks.
So knowing that the splits will help supercharge their gains going forward, let’s now take a look at why I remain high on Google and Apple, viewing them as fantastic companies and value-filled stocks.
The Ubiquitous Google
When a company’s name becomes part of our daily lexicon (we now say “I’ll Google it” when we’re going to do an Internet search), you know that a company has market power. Google remains dominant – the world’s No. 1 Internet search engine – with control of roughly two-thirds of the market. But the company has greatly extended the range and impact of products and services.
The company is behind the Android operating system that powers most of the smartphones and tablet computers sold in the world today.
According to the market researcher IDC,1 billion smartphones were shipped globally last year. Of those, nearly three-fourths were powered by Android.
At the same time, the company is pushing the boundaries of wearable tech with Google Glass. It has also moved heavily into robotics, snapping up a series of firms over the last two years. And Google continues to push the boundaries of robotic cars, so far racking up more than 2 million test miles.
This is a company run by visionary leaders and blessed by patient investors who know how to look beyond Wall Street’s obsession with quarterly numbers. Not that the numbers are bad – not by a long shot.
With a market cap of $363 billion, GOOG has operating margins of 23% and a return on stockholdersbeyond W (ROE) of nearly 15%. I expect Google to grow its earnings per share (EPS) this year by 21%, a rate at which profits would double in about 3.5 years.
So, while Google remains a “high-dollar” stock in the mid-$500s, you now can feasibly buy a few chunks. And remember: A double on $1,000 invested in a $500 stock results in the same amount of money as a double on $1,000 invested in a $10 stock.
Slices of Apple
Before I get into Apple’s fundamentals, let me expand a bit on this somewhat unusual stock split. I mean, 7-to-1? That sounds crazy.
Since 1980, only three other companies have had larger share divisions, and all of those were 10-for-1 splits. So consider ourselves lucky that shares are going to cost around $85 and not – as it would have been if the split was 2-to-1 – $300 or so.
I’ve been telling you for as long as we’ve had these twice weekly chats that I love Apple. And the news contained in the stock-split announcement speaks volumes about why I’m firmly in the Apple Bull Camp.
It doesn’t get much better than this. Apple announced the split along with its recent stellar quarterly earnings statement. The company:
- Beat earnings expectations: It reported earnings per share of $11.62, an annual gain of 15% that beat consensus views by nearly as much.
- Increased the dividend: Apple is going to raise its dividend by 8%. That would imply a pre-split payout of $3.55 a share, but the dividend will be divided proportionally with the new number of shares outstanding.
- Boosted its buyback: The iDevice king plans to increase its repurchase plan by a stunning $30 billion, increasing the original $60 billion by 50%.
With a market cap of $515 billion, Apple trades at just 12.4 times forward earnings. That’s a 25% discount from the S&P 500. But Apple is trouncing the overall market – with a year-to-date gain of 6.7%, compared to the S&P’s 2.84%.
Thus, both Google and Apple represent the kind of foundational plays that I enjoy telling you about. I want you to have a solid base in your portfolio so you can steadily increase your net worth. And these stock splits make it cheaper – even as they boost the returns we can expect going forward.
See you folks later this week.
[Editor‘s Note: Later this week, Michael will be sharing new research on a technology that could single-handedly disrupt $737 billion of America’s economy and radically transform just about every major industry, from energy, to transportation, to computing. Keep a lookout.]