As investors deal with inflation nearing 8%, record-high gas prices, and heartbreaking tragedy in Ukraine, a diversion to discuss something fun can be helpful. Few things excite investors more than a well-timed stock split.
While a stock split does not affect the fundamental value of the investment, there are several ways the division of shares can affect the market and assist amateur investors. On March 9, Amazon (AMZN +1.04%) joined Alphabet (GOOG +1.49%) (GOOGL +1.50%)in announcing a 20:1 split.
NASDAQ: AMZN
Key Data Points
Amazon's upcoming stock split
Amazon's announced stock split has been much anticipated and is exciting news for investors, especially in the wake of Alphabet's announcement. Amazon's stock will begin trading split-adjusted on June 6, and the Google parent's split will be effective July 15, subject to shareholder approvals. Other recent blockbuster splits have included Apple, Tesla (TSLA 1.49%), and Intuitive Surgical. The performance of these stocks post-split has been mixed. Apple and Tesla are significantly up from their August 2020 splits, while Intuitive is down since its split in late 2021.
Image source: Getty Images.
Why do companies split their stock?
So, what exactly is a stock split, and why do companies do them?
Companies split stocks for a variety of reasons. One is psychological: It can be discouraging for average investors to see a stock trading for thousands of dollars per share. It can also be unwieldy: Consider an investor who would like to dedicate $5,000 to Amazon stock. With Amazon trading at around $3,000 per share, this isn't possible. Once the company executes its 20:1 split, reaching the desired allocation is much easier.
In another situation, an investor may be depositing a set amount into an investment account each month, say $500. Will this investor want to wait six months to purchase a single share of Amazon? Probably not. This is how a split can be particularly beneficial to the little guy and employees of the company.
Another reason to split is to be included in the Dow Jones Industrial Average. With Alphabet and Amazon trading for thousands of dollars per share, they could never be included in the Dow due to how the index is calculated. The Dow calculates its index by adding up the share prices of the included companies and then dividing by a set number. Because of this, the stocks must have similar values, or the index would be heavily weighted by a single stock. Both Alphabet and Amazon will be candidates for Dow inclusion after the splits. This is probably the most compelling reason for the company to execute the split.
Inclusion in the Dow supports the value of the stock. Many investment vehicles track the Dow index, so companies included have high demand.
Which company will be next to split its stock?
There are plenty of candidates to be the next major enterprise to announce a split, and Tesla could be on deck again for several reasons. First, it is great publicity, and Elon Musk tends to relish Tesla's attention. Since the last split was announced, the stock has performed exceptionally well, as shown below, even after the recent swoon.
Also, with gas prices skyrocketing and showing little sign of dropping anytime soon, it is a terrific time to draw attention to electric vehicles. Tesla should be an excellent candidate for inclusion in the Dow by splitting the stock. Finally, Tesla has always enjoyed a considerable following among individual investors, and I have no doubt the company wants to keep the stock accessible.
The timing could be right with the current price over $750 per share. The stock price when it announced the 2020 split was just under $1,375. It then gained 49% between the announcement and the day the split took effect to trade over $2,000 per share. However, if Tesla's management aspires to get on the Dow it is unlikely the company would wait for the price to reach this point again. Also, given the positive effect on the stock price in 2020, management could use a split as a catalyst in what has been a disappointing 2022 so far for the stock price. Investors will be watching the company closely for a potential announcement.
Other candidates for a split include Chipotle Mexican Grill, Shopify, and even AutoZone. Shopify stock has struggled recently, falling close to 60% year to date. This may cause management to hesitate in doing the split. Both Chipotle and Auto Zone trade well over $1,000 per share, with AutoZone approaching the $2,000 mark. Chipotle has never split its stock, and AutoZone has not split since 1994, even though the stock has gained over 17,000% since then.
