Apple Inc. (NASDAQ:AAPL) is always at its best when CEO Tim Cook can deliver tangible progress, instead of manufacturing the illusion that the biggest company in U.S. history is still as dynamic as ever.
Many of us on Wall Street were braced to see Cook report a slight year-over-year sales decline in the face of global pandemic conditions and a more substantial hit to the bottom line. We thought he’d engineer the accounting to come out somewhere close to last year’s results.
What we got was a surprising show of strength. Sales across the company are up 11% from last year and net income expanded right in line with expectations.
After adjusting for Cook’s tireless stock buyback program, earnings per remaining Apple share are up 18%. On the surface, this is a growth company again, and it is running rings around a quarantine-shocked economy.
People did the surface math and figured that they’d rather own this stock than the S&P 500, which is tracking a harrowing 42% profit decline this quarter.
If I were forced to make that choice, I wouldn’t blame them. But the market provides hundreds of other options which ensure that alert investors will never need to reach for Apple if the deep numbers don’t add up.
I wouldn’t buy this stock at $400 just because it’s holding up better than most of its peers. And a month from now, I wouldn’t even pay $100 for it. I want more than what Tim Cook can engineer.
A Split Doesn’t Help Shareholders Or the Dow
Of course, a month from now, investors will receive three new Apple shares for every one they currently hold. The stated goal is to reach a broader base of investors, but I’m not convinced.
If Apple is too expensive at $400, you’ve also got to throw out Amazon.com Inc. (NASDAQ:AMZN) above $3,000, Booking Holdings Inc. (NASDAQ:BKNG) at $1,600 and change, Alphabet Inc. (NASDAQ:GOOG) around $1,450 and endless other retail investor favorites.
Remember, we can buy and sell fractional shares of any stock now. If you only have $100 today, you can own $0.25 a share of Apple or $0.03 a share of Amazon. You aren’t shut out of anything.
And current shareholders won’t automatically gain or lose anything. The company will remain a giant and well above $1.7 trillion in market capitalization as of today.
But Tim Cook will benefit because, as the share count rises, he needs to do less heavy lifting behind the scenes to create the per-share effects Wall Street demands.
Currently, I expect Apple to end up with about 2% less profit this year than it squeezed out of the business in 2019. Cook needs to buy back 86 million shares to show shareholders that mighty Apple isn’t actually deteriorating on a per-share basis.
Where this gets interesting is that accountants and analysts alike round numbers down to the nearest whole digit when we factor in a split. Apple earned $11.89 per share last year. Quadrupling the share count means that the figure in question will show up in the data as $2.97.
A fraction of a penny per share gets lost in the math. With a company as big as Apple, that fraction means Cook can spend less money to engineer the same earnings per share (EPS) “growth” as far as investors obsessed with per-share math are concerned.
If, for example, he just wants to show us 4% EPS growth this year, splitting the stock has just saved him $10 billion. Plow that money back into the buyback program and round up, and he might squeeze an extra percentage point of apparent growth out of the operation for free.
And in the meantime, the Dow Jones Industrial Average suffers. Because the blue-chip barometer is weighted around stock price and not market capitalization, dividing each existing AAPL share by four will force some complex adjustments.
Normally, those adjustments ensure that the benchmark remains unchanged, despite corporate accounting changes. However, because AAPL is by far the best-performing Dow constituent, its reduced role will hurt in the future.
If Cook had done this split at the beginning of the year, the Dow would be 2% lower today. That’s not a huge gap, but it still represents a vast amount of money.
Again, Apple doesn’t materially change. It’s just how the math plays out. And if Cook’s engineering remains resonant on Wall Street, I might need to cut my Dow target by 2-3% for the remainder of this year.
When you’re dealing with a company this big, it’s the little things that matter. After all, Apple has created enough wealth for shareholders this year alone to buy the 76 smallest companies in the S&P 500 outright.
That’s arguably too big for anyone’s comfort. While I know Tim Cook would hate to break the company up, maybe it’s time to start at least thinking about whether there’s value in division here. We’ll discuss that soon.
I talk about these things every week on my “Millionaire Maker” radio show. Are you listening? (Click here for recorded episodes and local stations.)