Why Amazon is splitting its shares

Slicing a cake into more pieces doesn’t give you more cake. So why is Amazon dividing its shares by 20?

Amazon has just announced a stock split for the first time since the dotcom bubble years. It’s the fourth such split in the company’s near-30-year history. Assuming the move is approved at the annual general meeting in May, then from 6 June, Amazon’s investors will get 19 extra shares for each one they already hold (what’s known as a 20-for-one split). Alphabet – Google’s parent company – did the same thing last month, for only the second time since it went public in 2004. 

To be very clear, share splits make no difference to the value of the company. It’s as if I gave you a cake, then said I was going to cut it into 20 slices. You’d still have exactly the same amount of cake (for the pedants out there, we’ll assume no loss to crumbling or sticking to the knife). Yet the share price bounced significantly on the news. So to ask the obvious question: what’s the point of doing this, and why the excitement? 

What’s the point?

The rationale often given for stock splits is to reduce the price of an individual share, thus making them more accessible – and indeed, that’s how Amazon spun it. Yet as we note below, this isn’t all that convincing, particularly in these days, when fractional share ownership is possible. 

Bloomberg’s Jonathan Levin and Eric Savitz in Barron’s suggest a more convincing reason why Amazon and Alphabet might want to consider stock splits. It’s all about getting more exposure to index-tracking funds. How? Alongside the S&P 500, the Dow Jones Industrial Average is the best-known stock index in the US. It comprises 30 big-name US companies. However, it’s built in a way that may have made sense when it was launched in 1896, but no longer does. The S&P 500 – like most headline market indices – is based on market capitalisation (the share price multiplied by the number of shares in issue). In short, the bigger the market cap, the greater its weighting in the index. 

By contrast, the Dow is weighted simply by share price. For example, UnitedHealth Group is the top-weighted Dow stock with a share price of around $500. Intel is the lowest, on $45. Yet United’s market cap of $460bn is less than three times that of Intel on $181bn. As a result of this odd methodology, the committee makes sure that the highest-priced stock in the index remains roughly ten times the price of the lowest. That means Amazon or Alphabet on share prices of around $2,500-$3,000 are simply too pricey for the Dow (whereas Apple, a fellow tech giant, is in the Dow with a share price of around $150). A 20-for-one split will put both in the running for the Dow – and all that lovely passive money flow.

Recommended

Is it time to pick up growth stock bargains yet?
Investment strategy

Is it time to pick up growth stock bargains yet?

If you’re thinking of picking up some bargains from the tech stock crash, beware – there are still plenty of “growth traps” out there. John Stepek exp…
26 May 2022
A fund that should give good returns from investing in good deeds
Share tips

A fund that should give good returns from investing in good deeds

Schroders BSC Social Impact Trust has made a solid start and looks more attractive than it did at launch, says Max King.
26 May 2022
Wall Street’s sell-off has further to go
US stockmarkets

Wall Street’s sell-off has further to go

The current stockmarket sell-off has been led by tech stocks, but the pain is spreading. The bear market has further to go – US stocks are still expen…
25 May 2022
Law Debenture investment trust update: premium over net assets slips
Investment trusts

Law Debenture investment trust update: premium over net assets slips

Saloni Sardana looks at the latest update from the Law Debenture investment trust, one of the six funds in MoneyWeek’s model investment trust portfoli…
25 May 2022

Most Popular

The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
Everything is collapsing at once – here’s what to do about it
Investment strategy

Everything is collapsing at once – here’s what to do about it

Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect th…
23 May 2022
Three high-yielding FTSE 250 dividend stocks I’d invest in right now
Share tips

Three high-yielding FTSE 250 dividend stocks I’d invest in right now

The average FTSE 250 dividend yield is around 2.4%, but many stocks yield much more. Rupert Hargreaves picks the best FTSE 250 stocks for income inves…
23 May 2022