At $300 per share, Apple joins the high-priced elite, where the rules are somewhat different
Apple Inc. (AAPL) recently touched and surpassed the $300 per share price level for the first time ever, placing it firmly in the sphere of high-priced stocks.
It joins such luminaries as Google (NASDAQ: GOOG), which currently trades at over $540 per share; Intuitive Surgical (Nasdaq: ISRG), $275; CME Group Inc. (NYSE: CME), $265; Mastercard (NYSE: MA), $233; Goldman Sachs (NYSE: GS), $152; priceline.com Inc. (Nasdaq: PCLN), $350; BlackRock (NYSE: BLK), $178, among several others.
Of course, the titan is the class A share of Berkshire-Hathaway (NYSE: BRK.A), which trades in excess of $120,000 per share.
Given the massive, unrelenting success the company has enjoyed, Apple shares may soar even higher, of course, but it's important at this juncture to point out that high-priced stocks behave somewhat differently from their lower-priced peers on the exchanges.
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For one thing, it is nearly impossible for the average retail shareholder to directly own a meaningful number of shares in these companies. (Through such vehicles as mutual funds and exchange-traded funds, the average retail stockpicker can gain some access to these companies, but still a very minimal stake nonetheless).
Indeed, about 80 percent of Google's shares outstanding is owned by institutions, while the figure for Apple is about 70 percent. (In contrast, Citigroup (NYSE: C), which now trades at about $4 per share, has only about 38 percent ownership institutions).
“I think it's fair to say that the higher-priced stocks tend to have very high institutional ownership,” said Sundaresh Ramnath, associate professor of accounting at the University of Miami-School of Business Administration.
Of course, a company can reduce its per-share price by implementing a stock split – but Apple hasn't enacted a split in more than five years; and Google has never had one.
Perhaps the question should be – do companies with highly-priced shares have any incentive to keep the value so high as to prevent ownership by retail investors?
“There's no real upside to having a lot of retail stockholders,” Ramnath said.
“The downside of having too many retail owners is that you might introduce too much volatility, because with a lower-priced share many day-traders and short-term investors can enter the picture.”
Ramnath cites Warren Buffet, the owner of Berkshire-Hathaway.
“As a value-oriented, long-term investor, Buffet likes having investors who are in it for the long haul,” he noted.
“I think he made a conscious decision not to split [the stock] and let day traders in. His desire was to have stable long-term investors invest in the stock rather than speculators who only increase volatility.”
Those who can't afford the huge price tag on Berkshire-Hathaway's A shares, might opt for the B shares (NYSE: BRK.B), which currently trade at about $84 per share – but even that price is beyond the reach of most average investors.
Fred Fuld, president of Stockerblog.com, a financial/markets blog, takes a somewhat different view.
He says that most companies would probably prefer to have a large foundation of retail investors.
“Having its shares spread out in a lot of different hands provides a kind of stability for a company,” Fuld said. “Despite the presence of some day-traders and short-term investors, the vast majority of retail investors have a long-term outlook -- especially for well-established companies like Apple and Google.”
In addition, Fuld said, if a company wants to do a secondary offering, it helps to have a large number of existing stockholders on hand that can buy those shares.
“Another reason companies like having a lot or individual shareholders is that when some institutions start to dump a stock, other institutional holders of the company seem to follow, which can severely depress a stock's price, because so many shares end up hitting the market,” Fuld added.
“Many institutions appear to move in waves.”
Ramnath points out that sometimes a company may indeed wish to reduce its share price through a stock-split in order to broaden their shareholder base and make the shares more marketable.
Indeed, Ramnath believes Apple will engineer a stock split within the next year.
“Researchers believe that only a good company will do a stock split,” Ramnath said.
“If a company's management thinks its shares are already overvalued, there's no reason to do a split, since the shares are likely to decline in value anyway. But for a company like Apple, whose share value keeps rising, it may be a good idea to do a split at some point.”
Fuld said he is surprised that neither Apple nor Google have split their shares recently; he sees no compelling reason for them to avoid it.
“I see no disadvantages with them splitting their stocks,” he said. “And I think Apple will soon have a stock split anyway. A split by either Apple or Google would draw huge interest for the investing public.”
Might Apple, Google or some other high-priced stock announce a huge split, say even on the order of five-for-one or even ten-for-one?
There is a recent precedent for this.
In mid-May of this year, Baidu (NASDAQ: BIDU) enacted a ten-for-one stock split. The day prior to the split, shares were trading as high as $714 per share. The company's stock is currently valued at about $98 per share (it has climbed steadily in price ever since the split).
Interestingly, Baidu still has high institutional ownership (about 65 percent) – perhaps because the shares are still beyond the affordability of most retail investors, or because institutions like splits as much as retail buyers do.
Also, stocks with higher trading prices tend to have lower trading volume (in the number of shares traded) than lower-priced stocks.
For example, with respect to well-known tech stocks, Fuld indicates that on average, Google trades 2.8 million shares a day, while Apple trades about 20 million shares a day. By contrast, lower-priced tech stocks such as Intel (NASDAQ: INTC) trade 74 million shares daily and Dell (NASDAQ: DELL) trades 23 million per day.
However, in terms of dollar volume traded per day, the picture is much different.
Google trades $1.5 billion a day and Apple is at $6 billion per day, versus $1.48 billion for Intel and $322 million for Dell.
Fuld also points out that most retail stockbrokers prefer dealing with lower-priced stocks, rather than their more expensive brethren.
“The online brokers don't really care about share prices, but
retail stockbrokers prefer to trade in low-priced shares since they want to maintain a diversified portfolio for their clients,” he said. “That would be hard to do with lofty-priced stocks.”
Moreover, some brokers make less money trading expensive shares because they're sometimes compensated by volume of shares transacted.