Why Apple's Stock Split Caused a Dow Shake-Up
September 8, 2020
By Michael List, CFP®
Apple has been shaking things up recently. This isn’t new for Apple, which has revolutionized cell phones, the music industry and the way companies reveal their new products, among other things. Apple was the first publicly traded U.S. company to have a market cap in excess of $1 trillion, and the record $2 trillion that it surpassed just last month.
But at the end of August, Apple performed a stock split that started a chain reaction in the media’s favorite index, the Dow Jones Industrial Average (or simply “The Dow”).
What is a stock split?
A stock split occurs when a company increases its amount of shares, by dividing existing shares into pieces. For example, after a 3-for-1 stock split, a shareholder will own three shares of $30 instead of one share at $90. Stock splits don't necessarily benefit or take away from a company's market value. However, they can make a company's shares seem more affordable to small investors.
On Aug. 28, Apple performed a 4-for-1 stock split. As a result, Apple now has 17 billion shares outstanding, rather than 4.25 billion; and the price per share fell from $500 to $125.
How did Apple's stock split affect the Market?
For the S&P 500, Russell 3000, and MSCI All World indexes not much changed. Apple still had a market capitalization of $2.125 trillion (17 billion * $125 = $2.125 trillion and 4.25 billion * $500 = $2.125 trillion). The Dow, on the other hand, was about to change in a big way.
Here's why the Dow is different:
The Dow, which was introduced in 1896, is a world-renowned gauge of the U.S. equity market, as a price-weighted index that tracks 30 blue-chip U.S. companies. But despite its renowned status, the Dow has some quirks compared to other index industry peers.
- First, the Dow is concentrated, tracking only 30 stocks, compared to the S&P index, which tracks 500 U.S. stocks; the Russell index, which tracks 3,000 U.S. stocks; and the MSCI All World index, which tracks over 8,700 global stocks.
- Secondly, the Dow is a price-weighted index, meaning each company's stock is weighted by price per share. The other major indexes, on the other hand, are weighted by market capitalization (total shares * price/share).
How did Apple's stock split affect the Dow?
Apple was added to the Dow in 2015, when the stock price was around $100, and had since increased to $500. Apple’s recent rally increased its weight in the Dow to 12 percent. However, the day Apple’s stock split (Aug. 28), its price was reduced from $500 to $125, which decreased Apple’s weight to around 3%. This resulted in an overall decrease in the Dow’s technology weight, so decision makers reviewed other components to change at the same time. At the time of Apple's split, it was decided that three companies — Exxon, Pfizer and Raytheon — would be removed from the Dow and replaced with three others: Salesforce.com, Amgen and Honeywell.
This move helped insulate the Dow from last week's stock market drop. Even though Apple’s stock slid 8% on Thursday, the impact was much lower because Apple held a much lower weight in the overall Dow index.
Why does this matter to investors?
After all, Apple is the same company it was a month ago. So are the other stocks added to and taken from the Dow. Why should a stock split have such an impact on the markets – well beyond its own company performance? There’s no simple answer to this question, other than to remind us that financial markets are dynamic. Part of our charge from you is to maintain an awareness of seemingly innocuous events that drive prices apart from fundamentals. Broad diversification – a core of our investment philosophy – helps minimize disruptions from such events. The focus stays on long-term goals, not short-term gyrations.
I hope you enjoyed your Labor Day holiday, but alas, summer is unofficially over. 2020 feels like one of the longest years in history, yet somehow it’s quickly coming to a close. If Labor Day has shaken up your focus (as it has mine), from thoughts of summer redirected to autumn (or winter today) and the end of the year, please reach out to your Advisor to review your account and get a jumpstart on any year-end planning.