By Andrew Grinzayd ‘24
Following quickly on the heels of Andy Jassy’s promotion to Chief Executive of Amazon in 2021, the company announced early last month a stock split of 20-1 for existing public shares. This was announced in conjunction with the Board’s approval of a stock repurchasing program worth $10 billion, sending shares of the company soaring by 6% in extended day trading. From tech darlings like Microsoft and Tesla to major banks and consumer corporations, stock splits have been a common tool for executives to send positive financial signals to the market while incurring a minimal upfront cost. But this begs the question… what is a stock split? why do companies choose to pursue them, and what can they tell us about the larger state of the American economy?
What is a Stock Split?
A stock split occurs when the board of a publicly-traded company decides to issue further shares to the market without diluting the value of investors’ existing stakes. This lowers the individual value of a share while maintaining the market capitalization of a company, and investors are compensated for the monetary value of their positions by increasing the amounts of stock they possess.
For instance, imagine you own 100 shares of Bank of America, which recently announced a 2-1 stock split that would be taken into effect immediately. While the individual value of each BOFA share would be halved, you would be compensated for your shares by 50% and increase your total investment to 200 shares. Thus, while you have nearly doubled your total share count, the monetary value of your investment has remained unchanged. Thus, many analysts characterize stock splits as largely cosmetic, as they don’t provide any tangible change or value to investors directly.
So Why Do Companies Split Their Stock
Traditionally speaking, stock splits have been used as a tool to increase the liquidity and tradability of certain assets when their perceived accessibility to retail investors has diminished. For instance, Amazon’s stock price around the time of the announcement was valued at approximately $3300, a sum that was largely out of reach to the average American. Increasing liquidity allows greater market participation while requiring no change on the part of Amazon’s business practices beyond some quick filings with the SEC. At the same time, it subtly signals corporate confidence in the longer trajectory of the stock price which has a more reasonable price differential to maneuver with.
What Is the Future of the Stock Split?
Companies will likely diminish the frequency and use of stock splitting in the following years, as most market-makers and brokerage firms have begun to provide fractional-share investing to interested consumers. In the short-term, stock splits may continue to serve as a largely symbolic gesture of financial success as companies make their shares artificially accessible to the average investor and their unending appetite for the growth-value of the tech sector.
For Amazon, the stock split will provide a coveted opportunity to purchase shares of the tech giant with greater ease and accessibility than in the past. With revenues growing approximately 20% year-over-year, the diluting of shares will likely reward new investors in the long-term, as the company has performed extraordinarily well since its listing on the NYSE in the late 90s.
Sources
https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-stock-split-10-billion-buyback.html
https://www.forbes.com/advisor/investing/what-is-a-stock-split/
https://www.forbes.com/advisor/investing/how-to-buy-stocks/
