Big Advantages To Splitting Stock… But Why Such A Silly Ratio, Apple?

Posted: May 6, 2014 in Apple, Business, Farros, Royal, Technology and Business
Tags: , , , ,

Everyone has already heard that Apple is going to split their stock 7-for-1 on June 2.

People say that it really makes no difference, that it’s purely optical… other than it making some investors feel more affordable.

Well, psychologically speaking, isn’t that a big deal?

But there is also another terrific reason to split a stock… and it surprises me that no one ever discusses it.

Generally speaking, a small beat may or may not drive a stock’s price up… but a small miss is generally a disaster.  Which means a stock with a high price is much more likely to be negatively influenced by a small miss than a stock with a more reasonable price.

Here’s an example:

On April 16th, Google traded at $556.54.  They announced net earnings of $6.27 per share… vs. analysts expectations of $6.44 per share.

Looks like they missed by 17 cents and the stock was down more than $20 the next day… and has slipped even more in the weeks following… a shame for such a stellar quarter.

Had Google split its stock 10-to-1… such that the April 16th share price was $55.65… such that net earnings were $0.63 vs. an expectation of $0.64… because of rounding the miss would have only been one cent … certainly something that feels a lot less.

(There’s that word again — feels — lest we not forget that emotion is a huge factor in short term stock performance.)

Better, without being buried under more ominous headlines, the positive aspects of GOOG’s quarter — of which there were many — may have had more of a chance of being appreciated.

So, I’m very happy Apple is splitting its stock…

… EXCEPT… 7-to-1?  That’s the silliest ratio in the world… 10-to-1 would make TONS more sense… as well as allow for easy comparisons with previous years — we all can divide exactly by 10 in our heads… but I don’t know anyone that can divide 7 consistently in any kind of exact way.

I asked someone in Apple finance what was the story with 7-to-1 and got a, “I have no idea, either!” glance.

Ugh.  I wonder if it’s too late for Apple to fix this?  While I love that AAPL is splitting, it really is absolutely, positively the most silly split ratio ever.

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