Some believe the split may be announced as soon as Thursday, when the firm is set to share its latest quarterly earnings results.
Investors responded favorably, bidding up Amazon's share price on Monday and piling into options trades that they expect to deliver gains should the split announcement come this week.
Amazon certainly fits the bill of firms that have split their stock in the past, says David Sekera, chief U.S. market strategist at Morningstar. "These are typically companies that have good growth outlooks and that have been financially successful," he says. "That's why Amazon's stock price has gotten as high as it has."
Investors who know Amazon's history have reason to believe its shares could go higher. Just ask the folks who invested before the company's first set of stock splits. If they held onto their shares, they earned a gain of about 48,000%.
In the past, investors who were bullish on Amazon's prospects have been rewarded for holding the stock over the long term. In the late '90s, the company executed three splits in quick succession, beginning with a 2-for-1 split in in 1998, when the shares were worth about $86 apiece. Had you held 10 shares of Amazon going into the split, you'd have then held 20, worth $43 each.
The stock split again in January 1999, this time giving investors 3 shares for 1 and bringing that total to 60 shares. Another 2-for-1 split in 1999 would have brought your share count to 120.
Amazon has grown quite a bit since then. As of the market close on April 27, 2021, one share of its stock is worth $3,417. That means your original $860 investment would now be worth $410,040. That's an annualized return of about 31% compared with a less-than 8% annualized total return (including dividends) in the S&P 500 over the same period.
A company executes a stock split by issuing additional shares to current shareholders, based on how many shares those investors already own. In a 2-for-1 split, investors receive two shares for each share they already own. A 3-for-1 split triples the share count.
As the term "split" implies, the value of the companies' shares is divided by the corresponding amount. A split does nothing to change the overall value of the company or the total value of the shares any investor holds. If you held a single $10 share of stock before a 2-for-1 split, you'd have a pair of $5 shares afterward.
"A split doesn't change the intrinsic value of a company," Sekera says. "It doesn't matter if you have 340 shares at $1,000 or 1,000 shares at $340."
There are a few reasons why Amazon may be headed to splitsville. Increasing the number of shares and making them cheaper means that more people potentially have access to the stock. Given Amazon's sky-high $3,400 per-share price tag, those who can't or don't trade partial shares of stock may be at a disadvantage when it comes to investing in the company.
Lowering its price per share may also allow Amazon to become part of the Dow Jones Industrial Average, says Neil Macneale, publisher of stock split newsletter "2 for 1." Because the Dow is price-weighted, with the highest-priced stocks occupying the top spot in the index, stocks that are too expensive can't be included.
"The average price of a Dow stock is $172.19. The median price of a Dow stock is $153.19," Macneale says. "To get close to either of these numbers, Amazon would have to announce a 20-to-1 split."
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Despite those potential upsides, the real reason companies like Amazon announce splits has little to do with numbers, Macneale points out. "It's a psychological thing," he says. "A split announcement is a signal from the board of directors that they think the company is doing well and will continue to do well for the foreseeable future — say, 2 to 3 years."
For nearly 25 years, Macneale has put this theory into practice in his own IRA. He'll buy shares in a firm when it announces a split, jettisoning most of them after about 30 months. Over that time span, his portfolio has returned an annualized 11.5%, eclipsing the performance of the S&P 500 by about 3 percentage points.
A split announcement is never a guarantee that a stock will perform well, even over the short term, says Sekera. "A split doesn't change the economic value of a company," he says. "You should always analyze the fundamentals before buying."
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