Stocks declined yesterday as talks between Ukrainian and Russian delegates made no progress. Inflation is at a 40 year high, but we all knew that.
Splitting hairs. It happened again. Another S&P500 heavyweight, Amazon.com, announced that it was commencing a stock split. That followed the earlier-in-the-year split announcement by Alphabet/Google. Amazon’s shares traded higher by +5.41% yesterday following the announcement which came after Wednesday’s close. Amazon shares are trading at $2,936.25 per share and many speculate that small retail investors can’t afford to purchase even one share, so a split, making it more accessible, should make the shares more valuable. Let’s unpack that.
The reality is that a stock split does not in any way affect the value of a company, it is simply spreading that SAME value over more shares. If you own 1 share of Amazon, it is worth $2,936.25, and if the planned 20 for 1 split were to take effect today (it is actually scheduled for May 27), you would wake up and own 20 shares of Amazon at $146.813 each…for a total value of $2,936.25. So, is it true that its cheaper per share price would make it more valuable? No, nope, not at all! If we use the PE multiple as an example for value, we need only to look at the formula to get the answer. PE is calculated by dividing the share price by EPS, or earnings per share. So, the P, Price will be lower by 95% (numerator), and the E, EPS (denominator) will also be lower by 95%, so, by pure math alone, Amazon’s PE would remain 62.95.
What about all that business about retail investors? Well, that is a little trickier to answer. Most retail investors, as we know them, can readily purchase fractional shares on their no-frills online platforms, so, in effect, an investor who read about Amazon’s split on a Reddit forum could buy $146.813 worth of the stock, but they would technically only own 1/5 of a share. Therefore, there is nothing from stopping a determined investor to invest less than the company’s current share price. HOWEVER, some investors do look at the absolute price of a stock when making decisions, even though it is purely emotional, and it has absolutely no financial or mathematic grounding. It is a similar emotion that causes investors to buy round numbers of shares versus allocating percentages or capital and then determining how many shares to buy. I think that we can all certainly agree that emotions are surely an investing factor, specifically for smaller, retail investors. So, it is fair to say that a stock split, indeed, has the potential to affect its price movement…at the end of the day.
Is that why behemoth Alphabet/Google and now Amazon.com decided to do 20 for 1 stock splits? Possibly…partially…but not likely. You, see its possible that those companies have designs on joining the Dow Jones Industrial Average. The Dow is a price weighted index, which affords a higher weighting to companies with larger share prices. If a company with a greater than $2000 share price were to join the index, it would have far too much of an influence over it. It would seem that a $146.813 share price might be more reasonable to the folks that decide which stocks get to join that elite club of 30 stocks. In that club, UnitedHealth Group (UNG) has the biggest impact with a 9.76% weighting and a share price of $491.44, while Intel (INTC) has the smallest impact with a weighting of 0.93% and a share price of $46.66. If Amazon were to split today and be added to the Dow Jones with its new $146.813 price, it would fit just below its fellow FAANG stock Apple, which has 3.15% weighting with its share price of $158.52. Though it is not necessarily the best representation of the state of the US economy, the Dow is possibly the most quoted index in the world, so being added to the list gets it noticed…by folks who may rely on emotions to make purchase decisions. Therefore, yes, a stock split can have a positive impact on a stock, especially if the split gains it entry into the Dow 30. Just how much and how long the effects last have more to do with market conditions and investor emotions…so I will leave it up to you to come up with those calculations.
YESTERDAY’S MARKETS
Stocks fell yesterday after CPI came in at a 40-year high, though expected, and lack of progress from talks between Ukraine and Russia. The S&P500 fell by -0.43%, the Dow Jones Industrial Average traded lower by -0.34%, the Nasdaq Composite Index declined by -0.95%, the Russell 2000 Index gave up -0.23%, and the S&P500 ESG Index dropped by -0.44%. Bonds traded lower and 10-year Treasury Note yields gained 3 basis points to 1.98%. Cryptos gave up -3.92% and Bitcoin traded lower by -6.12%.
NXT UP