OFF THE WALL: The stock split: why it’s a big thing for a small investor like me

By Daniel de la Rosa

When you are a small investor nursing along your IRA, everybody will yap at you that a stock split does not change anything.

Normally, they tell you that turning one share into two is just dividing the dollar. It’s worth exactly the same.

Let’s see, I have 37-plus shares of Apple. You punch in the dividend that is being paid out middle of May and it goes up to about 37.9. Apple will be splitting its stock 7 for 1. After that happens in June, the number of shares I have of Apple will become just a little over 265.

Psychologically, it’s a big thing for me.

The money may be the same, but 265 sounds better than 37.9. Even if future dividends go down to about 47 cents a share, reinvesting the payout means my shares will increase by about 1.5 shares per quarter. Right now, my shares in Apple are increasing at a rate of only 0.2 per quarter.

This is the fourth time Apple is splitting its shares. The first time was on May 15, 1987, the next on June 21, 2000 and the third on February 18, 2005. Each time, it was a 2 for 1 split.

After the third split, Apple went on a sustained rally which eventually hoisted the price of the stock above $700. Now, it is knocking on $600.

The price of Apple on June 9 when the 7-for-1 goes into effect should be around $85 if it stays at $600. Given Apple’s ability as the biggest company in the world in terms of its value, is there any doubt in my mind that Apple will not again vault over $100 in a few months’ time?

Apple has already said it will be launching something new this year. If it is something that even approaches the stature of the iPhone, then its share price after the split will not be staying under $100 for very long.

I can easily see Apple’s share jumping back over $200 or even $300 two or three years after the split. Who is to say that Apple’s share will not jump back to over $500 in five to 10 years? It may not happen, but I would have to say the odds are better than even.

What about Celgene?

Celgene plans to do a 2 for 1 split and has already asked shareholders permission to go ahead with the plan.

The stock is trading around $140-$150, but most analysts believe it can go much higher. Credit Suisse has a price target of $210. S&P Capital’s target price is $208. If you own, say, 20 shares of Celgene, it is seen to double to 40 after the split. The price of the shares after they are divided will be around $70 to $75. If they grow as much as they are expected to, the price will likely be headed over $100 in a year or two.

The only thing I do not like about Celgene at this time is they do not offer a dividend. I believe, however, that a dividend is going to come at some point in the next five years based on the way Celgene is growing.

I think that is why I love a stock split, especially in the case of really strong outfits like Apple or Celgene.
I don’t look at a stock split and say it’s nothing but the same old stuff. I look at a stock split and ask myself if this company is going to keep growing even after dividing its shares so many ways.

‘Off the Wall’ is a weekly column on the stock market. The comments expressed here are the author’s personal views and are not meant to recommend the buying or selling of stocks.

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