Apple Earnings Dividends and Stock Split

Finance Gourmet on April 24th, 2014

Apple is one of those companies that draws more than its fair share of attention. There are both the so-called fanboys, and plenty of haters out there to talk at high volume whenever the company does anything. However, the company is also a key component of the S&P 500 and most NASDAQ indexes. In other words, what Apple does as a publicly traded company matters to your personal finance.

Apple 2014 Q2 Earnings

You’ve probably seen the news by now. Apple had what many analysts are calling a blockbuster quarter. In particular, analysts were surprised by the increase in Apple’s revenue for the quarter.

apple-stock-logoIn a way, this is just further proof that analysts don’t really have any sort of crystal ball that regular investors don’t. Apple long ago stopped giving guidance to Wall Street. Without that guidance, Wall Street really doesn’t have a clue how things are going for Apple beyond what things like channel checks can tell them.

If you want to read about Apple’s second quarter earnings, there are several reasources including Marketwatch, and Apple’s investor relations website.

However, for long-term investors in Apple stock, the quarterly earnings are not the story. What is the story is the company’s new found interest in being more friendly to its stockholders.

Apple Stock Investor News

In addition to its mandated quarterly earnings report, Apple publicly announced several material changes to the stock that investors should know about going forward.

The most attention grabbing piece of Apple stock news was the announcement of a 7-for-1 stock split. A company uses a stock split to change the “going rate” for its shares of stock without changing the value to current shareholders. The most common type of stock split is a 2-for-1 stock split where investors get one extra share of stock for every share they already own, or two for one. In order to maintain the same value, the price of each share of stock is reduced by half.

An example, makes it easier to understand. If you own one share of XYZ stock trading at $100 per share, after a 2-for-1 stock split, you would have two shares of stock. Each share would be worth $50 per share. In total, you would still have the same $100 value, but each share would cost just $50. The whole process happens without any investor input via the exchanges. The stock exchange changes the price (after the market is closed) and your broker doubles the number of shares you own in your account. If you happen to have any physical paper stock certificates, the company typically mails you another certificate for your new shares to your address of record.

All trades are adjusted for the new price and share volume, so there is no way to make money or lose money on the stock split. Since there is no income or loss, there is also no tax consequences for a stock split.

For Apple, the 7-for-1 stock split turns Apple stock from a company with a stock that trades around $500 per share, into a company with a stock that trades around $75 per share. If you own apple stock, you will have seven times more shares than you currently own on June 6, 2014.

Why Did Apple Split Its Stock?

There are a couple of reasons that Apple split its stock. First, with some notable exceptions, most companies split their stock when the prices climb above a certain threshold. This prevents the situation where Apple stock someday trades for $10,000 per share like Berkshire Hathaway A shares do. When this happens, individual investors can be shutout of buying a stock.

For some companies, having only large shareholders works in its favor. On the other hand, that same dynamic allows big investors to build up big stakes in the company. For example, someone like Carl Ichan would now have to buy a lot more shares to build up a sizable holding. Apple is a company that individual investors consistently view favorably, so they may as well cater to them.

Finally, Apple stock, with its previous $500+ share price, is tough to include into price-weighted indexes like the Dow Jones Industrial Average because its movements would have too much influence on direction of the overall index where all the other shares are priced at much lower levels. While there is no indication the index is looking to add Apple right away, this lower stock price means it could at least be considered.

While the 7-for-1 number is unusual, it makes more sense than splitting the stock 2-for-1 on a more frequent basis. The 7-for-1 split gives the company plenty of room for stock appreciation. Even if the stock price doubled, the share price would be a very manageable $150 per share.

Apple Dividends and Share Buybacks

If prefer my shareholder capital returned in the form of dividends, but companies of all types love the idea of buying back their own shares instead. Apple is no exception.

Apple announced that it increased its share repurchase authorization to $90 billion from the previous $60 billion. That means that Apple can (but does not have to) buy up to $90 billion worth of its own stock. Theoretically, this means that there are fewer shares on the open market and that the price of the shares will therefore increase due to lower supply. In reality, these type of buybacks have the most affect on “per share” metrics. In other words, if Apple buys $90 billion worth of stock and its earnings stay the same, its earnings per share will still increase because the earnings would be divided over less shares. Executive bonuses are often tied to such metrics, but the goals tend to not be adjusted for the difference caused by a share buyback.

Apple did announce an increased quarterly dividend of $3.20 per share starting on May 15, 2014. This occurs before the stock split, so you’ll get $3.20 per share you have now, not after the stock split in June. The dividend amount will also be divided by 7 going forward. This new dividend gives Apple an approximately 2.5 percent dividend.

 

 

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