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The Apple Stock Split Is Just Smoke and Mirrors

Short Term Benefits to Apple's Stock Price Will Evaporate Without Innovation

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Yesterday afternoon the financial interwebs blew up with the announcement by Apple (AAPL) that it was instituting a 7-for-1 stock split.

Apple perma-bulls were lathering themselves up with the news, sure that this is the catalyst that will drive the stock price back to all-time highs.  Apple bears on the other hand were going on Bajungi tilt -- a term coined by my friend Kid Dynamite.

In addition to the split, Apple announced that they would be raising their stock buyback program by another $30 billion (on top of the $60 billion announced last year) and increasing their dividend by 8%.

The announcement that they would be cloning Steve Jobs from one of his toenail clippings recently found at their Cupertino campus was the only thing missing from the after-hours conference call.

Well, that and the announcement of new products.

Apple has had quite a run over the last ten years, both in terms of stock appreciation and in the introduction of innovative products.  But the stock market is all about "what have you done for me lately," and Apple's financials are not telling a pretty story.

It's not that they missed on their numbers, in fact revenue jumped to $45.6 billion in the last quarter, up from $43.6 billion in the same period the year earlier, or a 5% gain. They also outperformed in top-line earnings, up about 7 percent, to $10.2 billion, from $9.5 billion in the same quarter a year ago.

But what is troublesome is that both their revenue and earnings growth has slowed substantially in the last few quarters as their product line ages and is not refreshed anew.

In place of new product offerings they have resorted to financial shenanigans in order to goose their share price.  The worst of these is the stock split which is an anachronism from the days when individual investors made up the majority of the market and needed lower share prices to encourage buying.

Apple admitted as much by saying, “We want Apple stock to be more accessible to a larger number of investors.”

Unfortunately today's market volume is dominated by institutional investors who do not care about share prices, rendering stock splits little more than a parlor trick that only unsophisticated investors will fall for. 

Of course Apple bulls argue that splitting the shares as they did now allows the company to be considered for inclusion in the Dow Jones Industrial Average, which bases it's index weighting on share price, not valuation.

But that argument alone illustrates how close Apple is to jumping the shark as the Dow 30 was long ago abandoned by serious investors in favor of more representative indexes like the S&P 500, NASDAQ Composite, and the Russell 2000.

If Apple wants to reward its shareholders in a meaningful way they should worry less about short-term optics and get back to creating the types of products that they have historically been known for. Anything else is just smoke and mirrors and threatens to turn their stock into the type that only your grandparent would be comfortable buying.

Photo Credit:  Gazimal/Photodisc/Getty Images

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