Interactive Investor

Amazon shares to get cheaper as stock split confirmed

10th March 2022 15:26

by Graeme Evans from interactive investor

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Like its major technology peers, the internet retail giant has announced plans for a stock split. Here we explain what that means for shareholders and investors. 

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Amazon (NASDAQ:AMZN) shares are to become more accessible for retail investors after the e-commerce giant followed Tesla (NASDAQ:TSLA), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) in announcing plans for a stock split.

The shares changed hands last night at $2,758 (£2,100), which currently makes them the second most expensive stock in the S&P 500, and highlights the challenge for ordinary investors wanting exposure to one of the world’s best-known companies.

This situation has prompted Amazon to announce a 20-1 stock split so that current shareholders will get an additional 19 shares for every one they own today.

The total market capitalisation of Amazon will remain the same but the trading price will be reduced to about $140 (£106.61) based on last night’s price.

As well as helping retail investors, Amazon said the move should provide its staff with more flexibility in how they manage shares in the company they work for.

Trading on a split-adjusted basis is expected to start on 6 June, as long as shareholders approve the move at the company’s annual meeting on 25 May.

In a recent look at stock splits since 1980, Bank of America said companies see average returns one year later of 25% compared with 9% for the wider market.

It said today: “Some of the outperformance is likely due to momentum. Companies that announce splits have typically seen sustained market outperformance and expect that outperformance to continue.

“Underlying strength in the company is a primary driver of elevated prices. Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.”

Bank of America said discretionary, technology and health care stocks have averaged 26-38% in the 12 months following a stock split announcement.

Tesla shares rose 150% in the year after its split in August 2020, having risen 508% in the 12 months prior to the move. The split by Apple was followed by a 53% rise, compared with 87% beforehand.

Stock splits explained:

What is a stock split?

Sometimes a company’s share price rises so high that it is expensive for individual investors to buy just one share. A stock split reduces the price of a single share to a level that is more affordable.

How does it work?

If a company announces a 20-for-1 stock split, a shareholder will own 20 shares after the stock split for every one share owned before it.

So, someone who owned one share worth £100 before the split would have 20 shares worth £5 each (£100 divided by 20) afterwards.

Although the share price is lower, there are more shares in issue, so the value of the company stays the same.

Why do companies do it?

Retail investors typically prefer to buy more shares at a lower price than a few shares at a higher price. A share costing £1,000 also limits your options if you do not want to invest a sum in £1,000 increments. A lower share price can increase demand among investors, which can have a positive effect on the share price. More shares in issue also improves liquidity and might even narrow the spread between the buy and sell price.

Stock splits are becoming increasingly rare, with Bank of America noting that there have been just 28 in the past five years compared to a peak of 346 between 1996 and 2000.

Google owner Alphabet recently revealed plans for a 20:1 split to take place in July, potentially leaving Amazon as the last FAAMG (Facebook (NASDAQ:FB), Apple, Amazon, Microsoft (NASDAQ:MSFT), Google) stock to trade at over $1,000 a share. Both stocks are among recent purchases for Terry Smith’s popular Fundsmith Equity fund.

Amazon shares more than doubled at one point during the pandemic to $3,773 (£2,873) as it benefited from the home shopping boom created by lockdown restrictions. The stock is down 16% this year, however, as the sudden rise in interest rate expectations has diminished the appetite for all technology-focused stocks.

It is still worth $1.4 trillion (£1.07 trillion), with shares up 5% today after the stock split pledge and announcement that the company now has the scope to buy back up to $10 billion (£7.62 billion) of its shares.

This authority replaces the previous one worth $5 billion £3.8 billion) from 2016, under which Amazon had repurchased $2.12 billion (£1.61 billion) of its shares.

About $1.3 billion (£1 billion) was bought recently, the company’s first purchase since 2018. The practice pushes up the value of stock still in the market by restricting supply.

The most expensive stock to buy on the S&P 500 stock is currently housebuilder NVR (NYSE:NVR), which traded at $4,814 (£3,665) last night. Others include Booking Holding (NASDAQ:BKNG), with the owner of, KAYAK and trading at $2,035 (£1,549).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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