Stocks, Splits and the Dow

Kate Austin:

It’s 1987, and you have one share of Apple stock that you purchased for $22. Do you know what that share would be worth today? Keep listening as we explore this question, stock splits and changes to the Dow. Hello, and welcome to another The Adviser You Can Talk To Podcast. I’m Kate Austin, and I’m an Equity Research Analyst at Adviser Investments. Today, I’m joined by my colleague, Steve Johnson, a Portfolio Manager on our Dividend Income Strategy. Welcome Steve, thanks for joining me today.

Steve Johnson:
My pleasure to be here, Kate.

Kate Austin:
So stock splits have been in the headlines recently with both Apple and Tesla splitting their stock in recent days. So today we’re going to talk a little bit about what stock splits are, what they do and why investors should care. I’m not much for small talk, so let’s dive right in. Steve, can you define a stock split for us?

Steve Johnson:
Sure. The stock split has been around for many years. In fact, during the tech heyday of the ‘90s, we saw companies like EMC and Cisco splitting their stock every year. So a stock split, Kate, simply is a corporate action in which the company increases the number of its outstanding shares by issuing more shares to a current shareholder. So the market cap doesn’t change. What it means is that the price of the stock is reduced and you now have more shares. So if I had 100 shares of a company that was trading at $100, I would have $10,000. I’m now going to have 200 shares, worth $50. So the total value is the same, but I just have more shares at a lower stock price.

Kate Austin:
Got it. So it really shouldn’t mean too much for investors. Like you said, Steve, your dollar value stays the same. Steve, we have seen a lot of companies offering fractional shares, like Robinhood and Schwab. Both Tim cook and Elon Musk, the CEOs of both Apple and Tesla, said that they wanted to split the stock to reach a broader range of investors. This is really for retail clients like you and I, not institutional investors like the Vanguards and Fidelitys of the world, but these fractional shares are giving retail investors access. But quite frankly, they’re adding to the momentum trade, right? Can you unpack that a little bit for us? And what about the investors on the other side of the trade? The short sellers?

Steve Johnson:
Sure. Well, it has created this momentum trade and rather exacerbated it because back in the ‘90s, when companies split, it was because stock prices were expensive and retail investors had to pay a commission to trade and the shares were too expensive for them to buy. So there are all those reasons why a company would split. But as you mentioned, now we’re seeing the individual investor have a much larger piece of the pie of the trading session. Right now in fact, I think individual investors account for over 20% of the daily trading. And as you mentioned, companies like Schwab, Fidelity and Robinhood allow individuals to purchase fractional shares, or slices of shares. And so really the argument for making the stock more accessible to a broader base of investors, doesn’t really hold a lot of water here. Now, there is an argument that some of the price increase that we’ve seen in both Tesla and Apple is attributable to short sellers, where you actually don’t own the stock, you have to borrow it and then you actually have to buy it back to cover.

Steve Johnson:
Now, there has been some discussion that that has created a little bit of a dislocation in the market, and that is attributed the rise in some of these prices. But overall, Kate, I think the real big driver has been momentum. If we think about it, we’ve talked about growth stocks for the last, gosh, six months and they’re outperformance versus more traditional companies like banks and industrials. Now this momentum has continued. So since really Apple announced their stock split on July 31st, the stock was trading at $106. It reached a high this week of around $135, so about an increase of 28%.

Steve Johnson:
In the case of Tesla, it announced the stock split on August 11, and on a split adjusted basis, the stock was trading at $274. And even though we’ve seen a decline in the stock over the last couple of days, at one point, the stock was up 73% since that initial announcement of the stock split. So clearly the trade has really created more momentum and that the stock split is allowed yes, more investors perhaps to buy the shares, but it really hasn’t changed the underlying dynamics of the two companies.

Kate Austin:
Yeah, that’s a great point. So I want to talk a little bit about Apple. Apple has been one of the companies that has split their stock, this is their fifth time that they’ve split their stock, while some companies like Amazon have never split their stock before. A company like Tesla, this is their first stock split. So one of the things I want to talk about a little bit is if you had one share of Apple stock at the time of their IPO back in the ‘80s, you would have paid about $22 for that share. Due to all the subsequent stock splits, your one share of Apple would be worth 224 shares today. And if we split adjust the price backwards a little bit, instead of paying $22 at that IPO price adjusting for all the subsequent splits that share of stock would be worth just about 10 cents, that would be what you would paid for it back in the ‘80s.

Kate Austin:
So we talk a lot about this, about what could or would have happened if only, fill in the blank. But can you talk a little bit more about how difficult it is to stay the course over all these years, Steve, and all the times it would have been easier to sell out because I think it’s easy to say like, “Okay well, I had one share worth $22 or a hundred shares and if I had only stayed invested all these years, I would be super, super wealthy.” But can you talk a little bit about how difficult that is to stay the course.

Steve Johnson:
Without a doubt, Kate. First of all, let me say, I wish my parents had given me a high school graduation present in 1987 of one share of Apple. That would have been quite nice. I think we talked about this, 100 shares of Apple back then would now be worth about $3 million today. But you make a very good point because we know investors are sometimes fickle. We’re sometimes emotional about our stocks, I know I am guilty of this as well. And I have not met, in my 25 years of doing this, someone who owned Apple from 1987 on or even Amazon for that matter. So think about this, during that time period, over the 30 years, you’d have had to have held the stock during well, we know the bubble of ‘99 to 2001, where the stock, really, we had a drawdown of 80% to 90% in both Apple and Amazon.

Steve Johnson:
And so you had to survive the tech bubble from ‘99 to 2000. You then would have had to survive, again, the great recession of 2007 to 2009. You would have had to have held the stock during the death of Steve Jobs and the takeover by Tim Cook. And you also would’ve held during the whole controversy about Apple and what kind of company it was, especially when we knew that the goods were not selling as well, whether it been the iPad or even coming out with the phone and these new iterations. I know myself, I have been somewhat skeptical of the rise of Apple, and it’s unlikely that I would have held this personally during that entire time period. And so it stresses the importance though of discipline, and to be honest, not a lot of people have a discipline to hold a stock over that real length of time.

Kate Austin:
Yeah, that’s super important to unpack a little bit more so thanks for digging into that Steve. I want to switch gears a little bit now and talk about how Apple’s stock split has affected one of the larger indices in the US, the Dow. So the Dow is based off of stock price, not market cap, which is why the index has had to some changes in the wake of Apple stock split. Now, keep in mind, the Dow is only 30 stocks. The S&P 500 is, like it sounds, 500, and the NASDAQ is 2,500. And it is an actively managed index that is representative of the broader market. But Steve, can you walk us through some of the knock-on effects that the Dow has gone through since Apple split their stock?

Steve Johnson:
Sure, Kate. And it’s funny because a lot of institutional investors and folks in the business will refer to the index that they want to follow is the S&P. And the reason why is some people believe it’s a broader measure of the overall market. And in fact, there’s $11 trillion worth of money that is indexed to the S&P versus only $32 billion to the Dow. But most individual investors still like to reference the Dow. And actually on the nightly news, we always see the Dow being priced in points. And so with Apple splitting their stock, Apple was the number one weighting in the Dow. In fact, it was roughly about a 12% of the Dow. It was the number one weighting, but because it is price weighted, and they are splitting their stock four for one, Apple now becomes the 18^th-ranked stock in the Dow.

Steve Johnson:
And so there had to be some adjustments made, and as you mentioned, it is an actively managed index. So there is a committee, and what they’re trying to do is create an index that is representative of the U.S. economy. Now, one of the great criticisms of the Dow has been that it has not been representative of the U.S. at all. So if we look at the history, the Dow has been around since 1896, founded by Charles Dow, who also founded The Wall Street Journal (and I believe was also a Holy Cross grad). But one of the things that it’s interesting about it is that they have been trying over the last couple of years to make it more representative. And so the three names that are now out. So if we think about this, the Raytheon of the world, the Pfizer and Exxon they’ve now been removed from the Dow. And what’s interesting about that is Exxon was really the longest standing company in the Dow prior to being removed. It had been in since 1928.

Steve Johnson:
And just to show you how things have changed really since the ‘80s, if you think about it, the only energy name and the down now is Chevron, which represents about 2%. Back in the ‘80s, we know that energy represented a much larger weighting in that index, and to be honest with you, in our economy. But now we have become more service-oriented, more technology. And so the names that have replaced the Exxons and the Pfizers and the Raytheons, we’re now talking about Salesforce, Amgen, and Honeywell. And it’s interesting because Salesforce is a company that we use. It’s a company that most businesses will use for their client software and people believe this is more representative of what’s going on today.

Steve Johnson:
And so with that, Apple, as we mentioned now, becomes the 18^th-ranked stock. And number one, believe it or not is a health insurance company. So the UnitedHealth Group is the number one company in there. So we’ve seen really these changes followed by Home Depot is now in terms of the second largest waiting in there. And so a little bit more representative, I guess, of what we would think occurs in the economy.

Kate Austin:
So it sounds like with Apple splitting their stock, we’ve seen quite a few knock on effects from that. The committee of the Dow, it looks like, was forced to revisit the composition of the Dow. But this isn’t the first time that this has happened, right?

Steve Johnson:
No. It’s a great point, Kate, we’ve seen many changes over the years. And in fact, I think what shocked a lot of people was in 2018, GE, which was one of the original members of the Dow, was removed for Walgreens. So I think the point is nothing is sacred. And so when we look back at this, maybe if you and I are doing a podcast about the Dow 10 years from now, it’ll be interesting to see which companies are still there and which companies are no longer there and have been removed. Right now, the oldest company in the Dow is Proctor & Gamble, a company we use every day it’s been in since 1932. But it will be interesting to track the new members, Salesforce, Honeywell and Amgen, to see how well they’ve done. And we can track and maybe follow up with discussing the performance of those companies that have actually been removed.

Kate Austin:
Definitely, I couldn’t agree more. Thank you, Steve, this has been such a great conversation. I’m so glad we were able to talk about what stocks splits are, how they impact one of the largest indices here in the U.S., the Dow, and just talking about Apple a little bit deeper with all their subsequent stock splits. This has been Kate Austin and Steve Johnson from Adviser Investments. Thank you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts, and your feedback is always welcome. If you have any topics or questions that you’d like us to explore, please email us at info@adviserinvestments.com. Once again, I’d like to thank our editor and producer, Kailey Steele, for making this podcast a reality, and we’ll see you next time.