Apple Inc. - Die Story geht weiter

The Dow now has five tech stocks: IBM, HP, Microsoft, Intel and Cisco; Sacconaghi asserts that the index is underweighting tech stocks compared to the S&P 500, with IBM accounting for two-thirds of the current tech weighting in the index.

“We believe Apple is considering a stock split, and if Apple does choose to split its stock, this could lead to Apple’s inclusion in the Dow Jones Industrial Index.,” he writes. “We see multiple potential benefits from Apple’s perspective including a larger investor base and reduced option issuance/share dilution.”

The index has only two companies that trade for more than $100 a share – IBM and Chevron.

With a price-weighted index, high priced-stocks carry more weight. A 1% move in a $100 stock, in other words, has 10x the impact of a 1% move in a $10 stock. Due to splits, the divisor for the index has become a multiplier. The current divisor is 0.132129493. Today, Apple is up $13.62, or 2.3%, to $608.65. Ergo, were the stock in the index, Apple shares alone would be boosting the Dow by $13.62/0.132129493, which would be about 103 Dow points (adjusted for whatever company would have to come out of the index to make way for Apple.) That contrasts with, say, the S&P 500, which is market-capitalization weighted.

Inclusion in the Dow Industrials would likely give the stock a boost, since any index funds based on the indicator would be forced to buy Apple shares. Sacconaghi notes that there is $427 billion invested in broad-based ETFs. If 20% of them use the DJIA as a benchmark, and if Apple were to gain a 5% weighting in the index, it would imply incremental demand from passive investors of nearly 1% of Apple’s market cap. He notes that some active managers closely manage to the index, creating additional demand.

The idea of splitting the stock does not seem to be a religious issue for Apple: the company has actually split the stock three times before, each time a 2-for-1 split – the previous splits were in June 1987, June 2000 and February 2005. One question is whether a two-for-one split would be enough to get the stock into the index without overwhelming other components; you could argue that the stock ought to split four-for-one, or even six-for-one, which would still make it one of the highest priced companies in the index.

Update: Sacconaghi said in response to an e-mail from FORBES that he thinks a split could be 10-for-1, or even more, if Apple was really interested in having the stock added to the Dow.

One other note: Sacconaghi points out that Apple’s recent decision to pay a dividend boosts its potential to be added to the index, given that all of the other components are dividend payers. The analyst points out that Apple is the only company with a market cap above $215 billion that pays a dividend that is not included in the index.

Another key question: What company would be dropped to make room for Apple? The most obvious choice might be Hewlett-Packard, the company most directly competitive with Apple; note that Apple’s market cap at this point is almost 16x that of HP.

Fun factoid: For the year to date, Apple is up $202.66; HP is down $7.25. Had Apple (without any stock splits) been in the Dow for the full year to date rather than HP, the Dow Jones industrials would be 1,589 points higher, and trading north of 14,635, far ahead of the all-time record high on the Dow of 14,164.53, on October 9, 2007