Why Amazon Will Be Next to Do a Stock Split
Stock splits had almost become a thing of the past when Apple (NASDAQ: AAPL) came out with its surprise announcement to split its stock. The move was the fourth time that Apple had made such a move, but most of its tech peers -- including Amazon.com (NASDAQ: AMZN) -- had eschewed stock splits for years.
Apple's decision has some wondering whether other companies might jump back onto the stock split bandwagon. It's been more than 20 years since Amazon delivered a split to its shareholders, but there are some compelling reasons why now might be a good time to reconsider. Here's a quick look at them.
|
Effective Date of Split |
Split Ratio |
100 Shares in 1997 Would Now Be: |
|---|---|---|
|
June 2, 1998 |
2 for 1 |
200 shares |
|
Jan. 5, 1999 |
3 for 1 |
600 shares |
|
Sept. 1, 1999 |
2 for 1 |
1,200 shares |
Data source: Amazon.com investor relations.
1. Amazon's high stock price is a lightning rod for political criticism
Amazon has been under fire in Washington for a variety of practices, ranging from how it treats its employees to whether it pays its fair share of taxes. Inevitably, politicians point to the meteoric rise in Amazon stock and the resulting boost to the wealth of CEO and founder Jeff Bezos as symbols of avarice not just for the company itself but for the entire American corporate sphere.
A big stock split obviously wouldn't do anything to reduce the market capitalization of Amazon or the amount of wealth Bezos has. However, it would potentially take away the most evident measure of the company's rise in value. If a stock split sent Amazon's stock price back to levels at which it could just fade into the background, it might reduce its high profile at least to a minimal extent.
Image source: Getty Images.
2. Amazon could get an invitation to the Dow
The Dow Jones Industrials (DJINDICES: ^DJI) strive to include companies of all kinds among its 30 components. Back when Amazon was generally considered a tech stock, it looked unlikely that it would ever join the Dow, because there were already a huge number of tech companies among its ranks.
However, the creation of the communication services sector has effectively pulled Amazon's business out of tech entirely. The unit's internet retail business falls under consumer discretionary, while its Web Services division facilitates cloud-based communication for its clients. If that sounds like a technicality, it is -- but it might be just the excuse the Dow needs to add Amazon.
Before Amazon gets a Dow invite, though, it would have to reduce its stock price significantly. That's because the Dow is a price-weighted average, so Amazon's high share price is a non-starter for negotiations right now. If joining the Dow is the motive Amazon has, investors should expect a 15-for-1 or 20-for-1 stock split to get the job done.
3. Amazon wants to keep up with Apple
Finally, Amazon has always had aspirations to become the most important company on Earth. That makes keeping up with Apple a necessity, and Amazon will look closely to see what if any impact Apple's stock split has on its future share-price trajectory.
Apple's stock split announcement boosted interest in the stock even beyond its already impressive levels. That has sent Apple's market capitalization above the $1.9 trillion mark. Amazon remains closer to $1.6 trillion.
It might seem petty for such a successful company to pay attention to its market cap rankings. But Bezos has started to sell off significant portions of his stock, and if he wants to keep doing so, keeping the stock price high by whatever means are available is worth considering.
It ought to happen -- but don't hold your breath
Before Apple announced its stock split, the odds of Amazon splitting its shares were essentially zero. That's changed with the Apple split. Now, with these compelling reasons to move forward, there's a much greater chance that the FAANG stock will split its shares and try to get out of the uncomfortable spotlight in which the company finds itself.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Apple. The Motley Fool owns shares of and recommends Amazon and Apple and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.
