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Of Apple and the Dow


Who cares if the quintessential American company becomes a part of the most over-exposed number in the world?

MINYANVILLE ORIGINAL Yesterday, Apple (AAPL) saw its stock jump by 2.5% after Toni Sacconaghi, a researcher with Bernstein, said that the iPhone maker is considering a stock split that could make it easier for the world's most valuable company to fit into the Dow Jones Industrial Average (^DJI), the country's most famous stock index.

Sacconaghi noted that Apple is the only corporation with more than $215 billion in market capitalization that pays dividends, but isn't one of the Dow 30 components.

"We see the timing as ripe for Apple's potential inclusion in the DJIA," the analyst said, noting that Apple just recently started paying dividends. "We see multiple potential benefits from Apple's perspective including a larger investor base and reduced option issuance/share dilution."

As S&P Dow Jones Indices spokesman Dave Guarino reminds us in MarketBeat, Sacconaghi's sources could be wrong, and this could be 100% speculation. There are some pros for Apple being included in the Dow. If it was a member of the index, domestic equity ETFs like SPDR Dow Jones Industrial Average (DIA) will have to buy Apple shares to track the index. The analyst notes that companies that are set to be added to the Dow historically outperform the S&P 500 (SPY) by 300 basis points in the 30 days after the inclusion is announced.

It would seem that including Apple is more in the interest of the index's relevance than Apple's. The omission of the most prominent -- and one of the most respected -- companies in America makes the Dow seem a bit less relevant. When the Dow index was first published, it comprised just 12 industrial stocks. Since 1896, it was modified several times. For example, Microsoft (MSFT) and Intel (INTC) were added in 1999 to reflect the growing importance of computers in the American economy. The Dow changes when the economy changes, but with a bit of lag time.

This is part of the reason why the Bernstein analyst thinks that inclusion in the Dow should come soon. "In 1999, when Intel and Microsoft were added to the index, PC penetration in the US was 61% with consumer household penetration of 45% and business penetration of 74%. Further, in 1999 there were 47M PC shipments in the US, while 2011 North America smartphone shipments were 109M and LTM iPad shipments were 55M," he wrote in a letter to clients.

Of course, a stock split would make it much easier for retail investors to own a bit of the beast. Right now, 68% of Apple shares are held by institutional investors, which is roughly in line with most Dow components. And since the Dow index is price-weighted, rather than market capitalization-weighted like the S&P 500 and Nasdaq Composite (^IXIC), a split is definitely a requirement if Apple were to join the Dow. For argument's sake (and alphabetical continuity), let's say that Apple replaced Alcoa (AA) today. First of all, Apple will be three times the size of IBM (IBM), which is currently the most expensive stock in the Down. At today's price, and the current calculation of the Dow, the index would have closed at 17,598! Even at a 1:2 split, it would be at 15,293. A one percentage point change in Apple would result in about 20 points in the index. This type of volatility doesn't quite reflect the market as a whole, which is what the index is supposed to do.

But Should We Really Care?

Aside from the extra attention that Apple will get from index funds tied to the Dow, it probably won't make any difference. It could be that Apple, as always, is a rule unto itself. It's a blue chip in all but name.

Adam Davidson, one of my favorite chroniclers of the global economy for the New York Times (NYT) and NPR, wrote a wonderfully eloquent missive that basically says that the most widely-reported number in business is pretty much meaningless, especially because it is ignorant of the actual valuations of companies. He wries:

The Dow doesn't adjust for inflation either. Passing 12,000 points, as it did in early 2011, is incorrectly considered the equivalent to that supposedly magical moment in 2006, especially because we were in a bubble then and are coming out of a recession now. The Dow is also reluctant to add or subtract new companies. (Apple, perhaps America's model corporation, is not a member. Microsoft, by some measures its predecessor, still is.) It also, by design, ignores all sorts of things that influence daily economic life. Large-scale layoffs, which can reduce cost, often move the Dow up; environmental concerns don't factor.

Yet the Dow's biggest flaw, perhaps, is that it doesn't help us to make sense of an increasingly interconnected global economy - one in which what's good for G.M. isn't always good for the country. GE (GE), IBM, and Intel, for example, all make more than half their profits in other countries. And while this may be great for their shareholders, it means little for most Americans.

As for Apple: The company still hasn't announced a split, and might not ever.

Twitter: @vincent_trivett
No positions in stocks mentioned.
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