Following the stock splits of Apple Inc. and Tesla Inc. in August 2020, and Alphabet last February 2022, Amazon announced last night its plans for a 20-for-1 split and a share buyback of up to $10bn on May 27, with trading on the new split-adjusted basis beginning on June 6, though an approval from shareholders at Amazon’s annual general meeting in May is required for the plan to proceed.
In premarket trading Amazon shares were traded at 2,708, while on the split reports they gained more than 5%. In general, announcements of stock splits from these giants tend to add positive momentum to Wall Street, especially as the world economy tries to come out of the pandemic, but at the same time the market is currently facing increasing uncertainty as Russia intensifies its war on Ukraine. Investors could be seen cheering the giant’s decision as it tends to be interpreted as an opportunity that theoretically and traditionally increases trading liquidity, retail investing and volume.
Amazon’s shares have drifted more than 18% so far in 2022 and seen an overall 27% decline since 2021. According to the announcement, the $10 billion buyback plan replaces the previous $5 billion plan, of which $2.12 billion in shares have been repurchased, while the split is upon shareholder approval on May. If the shareholders approve the split, the price will drop to about $150 a share. That should entice new retail investors, and perhaps even earn it a spot on the DOW.
In contrast to the cases of Tesla and Apple, which proceeded with their stock splits due to massive growth in their shares, this is an effort from Amazon to boost its stock price in the face of heavy operating costs and concerns over staff retention. And that’s the main reason why Amazon decided to proceed with a split for the 1st time since 1999, despite its 220% appreciation since 2017.What is a stock split?
All public companies have a set number of shares that are outstanding. A stock split is an increase in the number of shares from the company by issuing additional shares after a company’s board of directors ruling. If a company announces a 4-for-1 stock split, the company will give existing shareholders three additional shares for every initial share that they had. For example, if a company had 10 million shares outstanding before the split, it will have 40 million shares outstanding after a 4-for-1 split. Meanwhile the price of the original share will be divided respectively, i.e. if it was worth $100 prior to the splitting, it would trade at $25 after it. Hence as the number of outstanding shares increases, the price decreases but the company’s market value remains constant.
Such actions aim to make a company’s share more affordable to retail investors, which will eventually increase liquidity in the stock.
Does it affect the company?
Not really, as the company’s market value remains constant. Other than the lower stock price and traditionally a boost of the price after the split, it means nearly nothing for the company, while it means a lot to the investors and to employees, as it makes the shares more affordable to investors while it gives employees more flexibility in how they manage their equity in the company.
But what is key in the Amazon case, is the $10bn buyback! A share buyback, also known as share repurchase, is a corporate action to buy back its own outstanding shares from its existing shareholders, usually at a premium to the prevailing market price. It can be an alternative tax-efficient way to return money to shareholders. Hence three of the main reasons for buybacks are:
- Stock buybacks help companies consolidate ownership.
- When there is market pessimism, companies use buybacks to increase equity value.
- Buybacks can make companies look more financially healthy, attracting more investors.
What does this mean for the stock market?
Based on The Wall Street Journal research, traditionally Stocks in the USA500 rise 5% in the year following share splits, including 2.5% immediately following the announcement according to research from Nasdaq Inc. on splits between 2012 and 2018.
This year things might be slightly different, since outsized reactions have been seen in the stock market due to external factors including a psychological component during a dismal year full of uncertainties and risks.
Generally however a stock split does not affect the broader stock market, with the Dow Jones Industrial Average being an exception since its value is not weighted by its components’ market value, but by its components’ share price value since it is a price-weighted index. The higher the share price, the bigger the influence that stock has over the Dow’s daily price swings.