Did Apple make the right choice of splitting the stocks?

By: Miguel A. Rodriguez

09:45, 14 September 2020

The effect of the stock split will reverberate in USA30.

After a quarter that beat analysts’ expectations, Apple announced that it would do a 4-for-1 stock split. Though this could have been excellent news for investors, experts believe otherwise given the current global situation.

Usually, a stock split is a clear bullish indicator that the company expects its stock to perform well in the long-term. According to studies, a two-for-one stock split had a 7.9% increase in one year, and within three years after the split, it added 12.2%. However, the effect diminished in the past years as the large institutions dominating the market can afford to buy the stock at a high price. Moreover, small investors can now buy a fraction of a stock, so the high price doesn't affect them.

Lately, stock splits have become few and far between, dropping from an average of 10 per year to three, according to S&P 500 sources.

The company’s four-for-one split would be the second, as it had another stock split in 2014. Although Apple considers it to be a move made to facilitate investor’s access to the stock, its influence within USA30 could decrease. Within USA30, the impact of a company is measured by the share price. Since 2015 when Apple was added to the index, it gained 230%, which, by extension, drove USA30 higher. At the moment, Apple represents roughly 10% of USA30, but after the split, it will only account for a fourth of it. The possible gains and losses will have a smaller impact on index performance.

However, the split won't affect USA500 because it is based on a company's market cap.

The question remains if the stock price would increase more because of its split than otherwise.

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Sources: reuters.com, marketwatch.com

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