For several years in the 2010s we worked for a fellow who had been a very senior manager at the NASDAQ before becoming the CEO of our firm. One day we got to talking about stock splits and why none of the NASDAQ’s most prominent tech companies seemed interested in doing them.
This was, and remains, an important issue for Wall Street’s equity trading ecosystem. Brokers and exchanges in the US generally charge commissions on a per-share basis, and payment for order flow (PFOF, why some retail brokerages charge no commissions) works the same way. The more shares outstanding, the more shares trade, the more Wall Street makes on a given stock, everything else equal.
His comment about why Big Tech was fine with high-priced stocks:
“We pitched them (managements of Google, Amazon, etc.) on splits for years, but no one at the companies had any interest. They are focused on institutional investors, not retail, so whether the stock is $100 or $3,000 is irrelevant to them.”
We got to thinking about that conversation again this afternoon when we saw that Amazon is going to split its stock 20:1. Google, of course, announced its own 20:1 split in early February. That leaves Tesla as the only stock above $500/share that also has at least a 1 percent weighting in the S&P 500 (counting Berkshire’s B stock). We assume TSLA will announce a split soon, although Elon Musk does have a habit of going his own way.
The interesting question is why Big Tech is suddenly so interested in no-comma stock prices. Managements here know that stock splits do not fundamentally alter the value of the company. So why the change of heart? Three ideas:
#1: Individual shareholders are also potential and existing customers. The surge in retail stock trading since the pandemic has created a new cohort of investors, many of them in their prime earning and spending years. Moreover, many of them see stock ownership as a direct relationship between themselves and the company. While the “meme stock” craze is largely over, it did prove that individual investors can care – intensely, in some cases – about the companies in which they invest.
Viewed from this perspective, it makes sense that Amazon and Google are splitting their stocks now even if they had no interest in doing so pre-pandemic. The most attractive demographic out there – millennials – are now active investors. Yes, they could buy a fraction of a $3,000 stock (many online brokerage platforms do this), but that’s not likely the same thing in their eyes as owning a few whole shares. That’s when they may start to care, and perhaps alter their own spending habits as a result.
#2: The Dow Jones Industrial Average. While the Dow’s price weighting is an anachronism, it will never change since doing so would make the “new” Average non-comparable to prior periods. Recall that Apple split its stock 7:1 in June 2014, taking it to $94/share from $658, and it joined the Dow less than a year later (March 2015).
Do Google or Amazon’s managements care about becoming Dow stocks like Apple? From a purely financial perspective, probably not; very little capital is indexed to the Average. From the perspective of corporate recognition, the answer is likely “perhaps”, especially since Apple is in the Dow and has a larger market cap than either company. All we – and they – know for sure is that your stock has to be less than $500 before you can be in the Dow.
#3: Signaling of corporate confidence. While not as powerful as a dividend increase or buyback announcement (Amazon did that today as well), one can interpret a stock split as a sign that managements are optimistic about their business. While entirely “optics”, no CEO wants to hear “remember when your stock was $2,000? Those were good times …” The only way to make sure that conversation never happens is to keep the stock moving higher after a split.
Summing up: Amazon and Google are run by disciplined and thoughtful managers, so seeing both companies announce stock splits within weeks of each says something new is happening in capital markets. Millennial investors may be small investors, but the rest of their wallet is large and growing.