After six years and an eight-fold increase in share price, maybe it’s about time

On Feb. 28, 2005, with Apple trading at $88.99 a share, the company issued a 2:1 split. The stock closed that day at $44.86. Within a year it was once again selling for more than $80 a share.

At The Mac Observer’s , where the question of whether Apple is about to split has come up every year since, investors like to remind one another what happened the last time.

“If I could write I note to Steve Jobs,” one investor posted last fall, quoting a “Great Speculations” column in , “I would tell him to split his stock three to four for one and it would be above 300-320 in a New York minute!”

With the six-year anniversary of that Feb. 28 event approaching and talk of a stock split once again in the air, let’s examine the pros and cons.

WHY APPLE SHOULD SPLIT:

• A well-structured stock split tends to raise prices, according to a 2008 study of the Thai stock market (), by reducing bid-ask spreads and increasing liquidity.
• It might make the stock, which has a relatively low price-to-earnings ratio, seem less “expensive.”
• By making it easier for small investors to buy more than a handful of shares, it might broaden the shareholder base and dampen the effects of the high-frequency trading that has whipsawed Apple in recent years.
• It could give the stock a psychological bump, sending a signal that the company expects continued growth.
• It would make it easier for Apple to join the Dow Jones Industrial average. (The DJI is a price-weighted index; at its current price, Apple would have 10 times more weight than many current components.)
• It would costs the company nothing. A split increases the number of shares without diminishing the company’s market value or the worth of its investors’ holdings.

WHY APPLE SHOULDN’T SPLIT:

• A split accomplishes nothing. It doesn’t change the price/earnings ratio, which is the real measure of a stock’s worth.
• The same Thai study showed that unless the split factor is large enough –perhaps 10:1 in Apple’s case — it won’t bring the price into a trading range that would actually increase liquidity.
• The institutional investors who hold most of Apple’s shares — 70% according to NASDAQ — are unlikely to be swayed by psychological efects.
• A split would actually increase costs to those institutional investors. (The fewer the shares, the lower their trading costs for the same value, which may be why you rarely hear analysts calling for stock splits.)