Is Apple ripe for a stock split?

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

Splits are indicated by gray circles. Click to enlarge.

On Feb. 28, 2005, with Apple (AAPL) 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 Apple Finance Board, 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 Forbes, “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!”

Of course, the stock has since climbed past $320 quite on its own. It closed Tuesday at a record $355.20, up 0.94% for the day and more than 690% since the last split.

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 (PDF), 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.)
Adding Apple to the DJI wouldn’t necessarily be a good thing. As one AFB investor put it: “AAPL is already too much influenced by indexes. We don’t need more of it.”
Steve Jobs seems to like seeing Apple priced higher than most other tech companies. Asked about a split a few years ago, he praised the investment philosophy of Warren Buffett, whose Berkshire Hathaway (BRK-A) closed Tuesday at $126,437 a share. In its famous 1983 Annual Report, Berkshire Hathaway had this to say about why it didn’t split its stock, then selling for about $1,300:

“Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?… If the holders of a companies stock and/or the prospective buyers attracted to it are prone to make irrational or emotion-based decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations. Such aberrations may help us in buying and selling the stocks of other companies. But we think it is in both your interest and ours to minimize their occurrence in the market for Berkshire.”

One could argue that in the hands of the institutional investors who control 7 out of 10 Apple shares, the company is already seeing some pretty silly stock prices and manic-depressive valuations. See for example here, here and here.

Isn’t it possible that the small investors who would buy the stock if it were priced at $35.52 rather than $355.20 — and who generally don’t short stocks, trade options or run hedge funds — would actually calm the market and make trading in Apple more rational?

We put the question to Apple Investor Relations. Their bland, official reply: “We have not announced any plans for a stock split.”

Also on Fortune.com:

[Follow Philip Elmer-DeWitt on Twitter @philiped]