Apple products are extremely popular, but the focus of an article by Christopher DeSousa in the Daily Finance was the company’s strategy to increase the popularity, and therefore the demand, for its stock. Apple has done this by hinting at new and potential disruptive products like the innovative iPhone and iPad have been. In addition, Apple is doing well in the industry with results reported in the article to be similar, but slightly higher than those in the same period one year ago. There is intense competition from China in the smartphone and other markets, and Samsung is one company which has its seen sales stagnating. Apple has had some setbacks, such as lower than expected average retails prices for iPhones. On the other hand, China may be where Apple is able to show the most growth in the future, so there is considerable uncertainty. If investors felt that Apple may feel similar impacts, they might not be as interested in investing in Apple stock. It is perhaps for this reason that Apple has chosen to make their stock offerings more attractive to investors by splitting stock, increasing its stock buyback and raising quarterly dividend by 8% with promises of further increases. This has the potential to increase the demand and shift the supply curve to the left in terms of supply and demand theory in economics.

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Splitting stock does not involve an increase in value of the company or its profitability, however it has the capacity to increase demand by lowering the price (and the share value) which attracts investors in lower priced stock markets. The price of stock is more marketable, and the demand for the stock increases relative to the same supply. Stock splits are also a sign of higher expected earnings in the future due to growth. It does not change the value of the company or the stock itself, it is just breaking up existing stock values into smaller units of stock for offer. The result is upward movement on the existing demand curve to reflect the higher demand.

By adding $30 billion to its stock buyback program Apple ensured that it was increasing its own share at a rate of 150% of that previously. This is also a means of raising the value of stock by having less in circulation. By decreasing the supply, the relative demand is increased, putting upward pressure on price, which therefore rises. It may also increase earnings for each share, and speculation on this may further increase demand. The change in supply curve is represented by S2, which shows the decreased supply and therefore increased price with the same demand.

Apple has also increased the attractiveness of stock by increasing the dividend which is paid four times a year by 8%. Statements have been made that the value of the dividend will continue to increase in this manner. This increases potential earnings as well as the value of the stock for investors due to the higher potential return. As with splitting the stock, this causes movement left on the demand curve to a higher equilibrium price.

An important piece of information to note is that despite the movement of supply and demand, the company itself, and the value that it represents, has not changed. As DeSousa stated in the article, the “price-to-earnings, dividend yield, and equity market value remain unchanged” (DeSousa 2014, n.p.). Therefore, despite the price difference shown in X1 (market supply and demand for Apple stock without management’s strategy) and X2 which shows the shift given a reduction in supply, and despite upward and leftward movement up the existing demand curve with an increase in price, the company is not worth more; it is simply doing a better job of marketing shares in Apple.

References

  • Sinha, K. C., Labi, S., & Wiley InterScience (Online service). (2007). Transportation decision making: Principles of project evaluation and programming. Hoboken, N.J: John Wiley.