Investors shouldn’t get overly excited about stock splits. In most cases, they don’t amount to much.
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After the close of regular trading Wednesday, Amazon.com shares surged as much as 10% after the internet giant announced plans for a 20-for-1 split. The company also said it would buy back up to $10 billion of its stock.
Companies that do stock splits make the point that the maneuver will permit new investors to buy shares at a more affordable price. Amazon’s stock currently trades at more than $2,785, putting individual shares out of reach for many retail investors. But these days, the notion that ordinary investors will benefit from cheaper shares is dubious. Online brokerages such as Robinhood Markets Inc. offer the ability to buy fractional shares in popular stocks, including Amazon.
More importantly, the stock split doesn’t make Amazon a more valuable investment or change anything about its underlying business. It just divides the pie into more pieces. Each shareholder will still own the same percentage of the company after the split.
Unlike stock splits, stock buybacks often are legitimately a good thing for shareholders. By reducing the number of shares in the market, investors’ ownership stakes do become larger.
But in this case, Amazon’s share buyback might not make that much of a difference. First, it replaces a $5 billion authorization that was already in effect, of which $2.12 billion was already bought back. In addition, there is no expiration date, meaning the company can decide not to repurchase shares. Finally, $10 billion may seem like a large number, but in the context of Amazon’s $1.4 trillion market value, it amounts to less than 1% of its shares. That’s too small to affect the stock price significantly over time.
Stock splits by high-profile companies tend to make a lot of news. Alphabet Inc. generated buzz when it announced a 20-for-1 split of its own last month. The internet company’s shares also initially soared, but in subsequent days the gains faded — as will likely be the case for Amazon.
Read the full article here by Tae Kim, Advisor Perspectives.
