Part 2: What Does the Apple Stock Split Really Mean?
In our last blog post we talked about the history of the Dow Jones Industrial Average (DJIA) and how the value is calculated every day. In this post, with a lot of help from WAPO columnist Allan Sloan, we will talk about what happened to the Dow when Apple split and then what the actual split, and other Dow 30 changes, mean to average investors like us. Get your calculators – or you can just trust my math!
Apple stock split
On Friday August 28, the Dow closed at 28,653.87. Over that weekend, Salesforce, Amgen and Honeywell were added to the Dow 30 and ExxonMobil, Pfizer and Raytheon were removed. Apple also split 3 for 1. And on Monday August 31, the Dow opened at, wait for it, 28,653.87. Remember that Tesla also split that weekend, BUT Tesla is not part of the Dow 30. None of these changes had any impact on the S&P 500.
Let’s look at what actually happened on the Dow:
On Friday the sum of the price of one share of each of the 30 components was $4177.68. The Dow Divisor was 0.1458. SO the closing price that day was the sum of the prices of 1 share of each stock, divided by the Dow Divisor. ($4177.68/.1458) or 28,653.87
Next the prices of ExxonMobil, Pfizer and Honeywell were subtracted from $4177.68 and the closing prices for Salesforce, Amgen and Honeywell were added. Apple’s price was modified from $499.23 to $124.81
When the prices for the new Dow 30 were added, the total was $4355.02. The new Dow Divisor, was then calculated to be 0.152 ($4355/28,653.87)
Thus the closing DJIA on August 28 and the opening DJIA on August 31 were the same. The Dow Divisor moved from .146 to.152 to account for the changes and keep the DJIA constant.
So now what does all of this mean to us?
On Friday before the stock split, Apple was by far the largest Dow 30 component at 12%. On Monday after the split, it was 3%. Because Apple has been such a hot stock, it has disproportionately impacted the Dow’s performance. On Monday, Apple gained $4.23 which moved the Dow by 28 points. If that had happened on Friday before the split, that same share price percentage increase would have moved the Dow by 116 points! Will the Dow’s growth slow due to this change? Could very well happen.
The higher Dow Divisor should mean less volatility for the DJIA. On Monday when the Dow Divisor was higher, a $1 change in any share price moved the DJIA by 6.58 points. On Friday when the Dow Divisor was lower, that same $1 share price change moved the market by 6.86 points. Given the world we live in right now, we will take less market volatility any way we can get it.
One of the stated reasons that companies undergo a stock split is to make their shares more accessible to average investors. Presumably more investors can afford a $125 share price rather than a $500 share price. While this is technically true, the vast majority of shares are owned by institutional buyers (mutual and pension funds) who are not worried about such mundane things. Additionally more brokerages are now offering partial share purchases to help investors buy some of these high priced individual stocks. Although pundits are split about equally on whether stocks go up or down after a split, this could be a good opportunity to buy some gift shares for your children or grandchildren.
For any investors who own one of the two ETFs which track the Dow, this change triggers significant buying and selling of equities to match the new Dow. Luckily, ETFs are relatively tax efficient, so these changes should be inconsequential unless the ETFs are sold shortly after a major update.