Apple Stock Split Removes Obstacle to Inclusion in DowCallie Bost and Joseph Ciolli
Apple Inc.’s first split in nine years removes an obstacle to its inclusion in the Dow Jones Industrial Average: its $525 stock price.
The iPhone maker will exchange seven shares for each that is held on June 2, a move that if enacted at yesterday’s closing price would lower its shares to about $75 apiece. Previously, the stock traded for so much that putting it in the Dow would have given Apple too much influence in the 118-year-old equity gauge, which ranks companies by the level of their shares rather than market value.
Apple’s exclusion highlights idiosyncrasies in the Dow methodology that leave some of the world’s biggest companies out of one of the best-known stock measures. While the lower share price clears one obstacle, changes to the Dow are rare and any decision on additions will be up to S&P Dow Jones Indices LLC, the joint venture that oversees the average.
“I’d think Apple is up next,” said Richard Moroney, chief investment officer at Horizon Investment Services in Hammond, Indiana, and editor of the Dow Theory Forecasts newsletter, said in a phone interview. “Really the only barrier keeping Apple out of the Dow was that high price tag. It’s the biggest company, it’s clearly a quality company with a long record of success and it’s the leader in its industry -- all things the keepers of the Dow Jones Industrial Average look for.”
David Blitzer, chairman of the S&P Dow Jones index committee, declined to comment on what a stock split at Apple, the world’s most valuable company, could mean for its inclusion in the 30-stock Dow.
At $75, Apple would be roughly tied with UnitedHealth Group Inc. for the 18th-biggest weighting in the Dow. The index’s biggest portion is held by Visa Inc., whose shares closed yesterday at about $209. Cisco Systems Inc. is the smallest at $23.50. Shares of Apple climbed 7.5 percent to $563.84 at 9:53 a.m. in New York.
“It makes the stock more attractive to the smaller buyers,” Jon Burnham, a New York-based fund manager for Burnham Asset Management Corp., which oversees about $1.2 billion, including Apple shares. “It’s better priced and more people will buy it.”
Stock splits have diminished in the last decade as the role of institutions and exchange-traded funds grew in the equity market, leaving some large companies effectively ineligible for the Dow average. Just 14 S&P 500 companies split their stock last year, compared with an annual average of 49 since 1980, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones in New York.
Blitzer of S&P Dow Jones said after the last round of changes to the measure in September 2013 that Apple and Google Inc. were handicapped by share price.
“Clearly, Google and Apple are huge companies, very big and very well known, and there’s no question that they’re very important to the U.S. and the global economy,” he said in a conference call with reporters at the time. “The prices of their stocks are so high that putting Google in would completely distort the index and it wouldn’t work.”
The five-year bull market has pushed the number of companies in the S&P 500 with share prices above $100 to 90 as of the close yesterday, almost three times the level in 2010. Google Class A shares closed at $537.51, effectively making them too expensive for inclusion in the Dow average even after what amounted to a 2-for-1 stock split this month.
Stocks are chosen for the average by a committee, unlike most indexes maintained by S&P Dow Jones that are picked through an objective, rules-based process. While changes in membership are unusual, they often involve more than one company at a time, according to Dow’s guidelines.
The average was last reshuffled in September, when Goldman Sachs Group Inc., Nike Inc. and Visa replaced Bank of America Corp., Hewlett-Packard Co. and Alcoa Inc.
The Dow average was devised in 1896 by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. It originally included General Electric Co., American Tobacco and 10 other companies before expanding to 20 companies in 1916 and 30 in 1928.
“We’re talking about Apple here,” Ryan Jacob, manager of the Jacob Internet Fund, which oversees $90 million including Apple shares, said by phone. “It would be significant because the Dow is supposed to be representative of the economy and Apple is one of the biggest companies in the world and a technology leader.”