Amazon Is Splitting Its Stock. Why It Wants A Lower Share Price

Amazon Is Splitting Its Stock. Why It Wants A Lower Share Price

Amazon stock is surging after the e-commerce and cloud computing company confirmed a 20-for-1 stock split and an extended stock-repurchase program.

While stock splits don't add value to holders mathematically—they're the financial equivalent of splitting a pie into smaller pieces—retail investors appreciate them, and split announcements often cause short-term rallies. Indeed, Amazon stocks rose 6.4% to $2,962.34 on Thursday.

Amazon also announced a $10 billion stock-repurchase program, which replaces a prior $5 billion stock-purchase authorization, under which it repurchased $2.12 billion of its own shares. The plan does not have a set end date.

The Amazon split comes on the heels of Alphabet's announcement in February that it would split its shares 20-for-1 beginning July 15. In 2020, Apple will divide its shares four-for-one.

One possible advantage of the Amazon stock split, as with Alphabet, might be the inclusion of the corporation's equities in the Dow Jones Industrial Average.

Adding high-priced stocks to the Dow is difficult because the index is price-weighted, which means that the same percentage move counts more for a high-priced stock than a low-priced firm. So a 1% rise in UnitedHealth, which trades for $486 per share and has the highest-priced stock in the Dow, has almost three times the weight in the index as a similar move in Apple, which finished Wednesday at $163.

Adding a stock with a four-digit price tag would immediately give the corporation the biggest weighting in the index since neither Amazon nor Alphabet are presently included in the index. The splits have the potential to alter that.

It is also worth noting that the Dow component list is updated infrequently—the most recent changes were in August 2020, when Amgen, Honeywell, and Salesforce.com were added to the index, replacing Exxon Mobil, Pfizer, and Raytheon.

The Amazon split will go into effect on May 27 at the end of the business day.