AAPL’s 2Q14 earnings report last night was full of mostly positive surprises:
–earnings per share came in at $11.62. That’s about 15% more than the Wall Street analyst consensus had expected, and higher, by about the same amount, than results in the same quarter a year ago. It’s the largest margin AAPL has beaten the consensus by in years.
–the company is raising its dividend and increased its proposed share buyback amount by $30 billion
–AAPL is going to split its stock by 7 to 1.
Of these developments, I think the most important is the stock split.
Academics will tell you two things about stock splits:
1. Stock splits have no direct economic significance. Its’ simply paper shuffling. Instead of having one share that trades at, say, $560 you’ll soon have seven shares, each trading at $80.
2. The stocks of companies that have stock splits tend to underperform for a period after the split occurs.
The second comment, while true, is, well, silly. All the outperformance comes between the period when the stock split is anticipated by the stock market or actually announced and the date when the split takes place.
The first is also true–particularly in the United States (but not in many foreign markets). But this doesn’t mean that the AAPL split has no relevance.
(See my post on stock splits for more details.)
–stocks with very high per share prices tend to underperform. Why? I don’t know. I think it’s because retail investors prefer to buy stock in round” lots (usually 100 shares). This may be an echo from the days a half-century ago when trading costs were very high and when the commission for an “odd” lot (anything that isn’t a round lot) was particularly expensive. For AAPL, this would be a commitment of over $50,000–too rich for a single position for most people.
Yes, it makes no sense. But, whatever the reason, retail investors like stock splits and respond positively to them.
–more important, studied management contempt for shareholders, who after all are the owners of the company, has long been a key feature of the AAPL persona. It’s part of the Steve Jobs legacy. But it’s not a good one. To me the stock split is a sign that the current management finally realizes how poisonous the Just-Like-Steve mentality has been and is beginning to shake off its shackles.
I don’t think this means AAPL returns to the super growth of its past. On the other hand, I do think that, if I’m right about the attitude change, that the JLS discount multiple Wall Street now applies to AAPL stock will gradually disappear. Just achieving a market multiple would imply a 30% gain in the stock.