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Apple's Stock Split Is Gift to Retail Investors

Stocks in this article: AAPL

NEW YORK (TheStreet) -- Contrary to financial theory, Apple's  (AAPL) 7-for-1 stock split has the potential to increase the company's valuation.

Apple announced the 7-for-1 split Wednesday, at the same time it said it had increased its stock buyback authorization to $90 billion from the $60 billion announced last year. The Cupertino, Calif.-based company is also increasing its dividend.

The stock split will apply to investors who hold shares as of June 2. They'll receive six additional shares for each share held. The stock will begin trading on a split-adjusted basis on June 9.

The move, which should reduce the company's stock price from the $550 range to around $75, follows calls for Apple to broaden the company's stock appeal for individual investors.

Financial theory states that changing the number of shares outstanding for a company does nothing to its valuation, but a common-sense view of Apple's current situation supports the idea that the stock split could benefit Apple's valuation.

The cheaper stock price will allow retail investors to now trade Apple stock in 100-share blocks. Most brokerage firms give discounts to investors who trade in blocks.

Previously, a block of Apple shares would have cost more than $50,000, putting it out of reach for most small investors. With the stock split, however, the block would cost less than $10,000.

The lower price would give access to a larger portion of the market, potentially increasing trading volumes and decreasing the bid-ask spread.

What's more, stock splits can spur investor confidence.

They tend to occur when a company's stock price has grown considerably due to strong performance over the past few months or years. Apple had a massive run-up from $80 in 2009 to more than $700 in 2012, and has settled at more than $500.

The split sends the message that the company is moving on from old successes, restarting at less than $100 a share, and that strong performance in the future could lead to another huge gain.

Fundamental analysts say Apple's stock split is arbitrary, but the world of equity trading is as much about investor perception as it is about sales and profit margins.

Only time will tell whether Apple's financial engineering at the hands of CEO Tim Cook will benefit the company's shares as much as product hype and sales have helped them in previous years.

AAPL Chart
AAPL data by YCharts

At the time of publication, the author had no positions in stocks mentioned.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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