Amazon.com Inc. (AMZN) hit the magic price of $1,000 per share on the morning of May 30, but there's no indication that CEO Jeff Bezoshas any intention of splitting the stock, the Wall Street Journal reports. To the contrary, letting your company's shares soar to such a dizzying price is "a new way of calling attention to yourself," as finance professor William C. Weld of the University of North Carolina Kenan-Flagler Business School told the Journal. For this, and other reasons, stock splitsare becoming increasingly rare.
Signaling Dominance
In the case of Amazon, astock price above $1,000is a way of signaling the company's dominance.The company now accounts for nearly 9% of all general merchandise sales in the U.S. except food, gasoline, autos and restaurant meals, according to data presented by Barron's. And that astonishing percentage is growing.
Moreover, by not splitting its shares, Amazon theoretically presents past and future investors with an unchanging yardstick against which to measure returns. Amazon shares, which closed Friday at $995.78, now trade at 14.3 times their closing price of $69.63 on May 29, 2007, just a decade ago. The stock reached an intraday high of $999.00 on Thursday.
But Split Not Ruled Out
Amazon split its shares three times while it was a young public company, the Journal says. During the company's annual shareholders meeting on TuesdayMay 23, Bezos was asked about the possibility of a split, to make Amazon shares more affordable to middle class and young investors. "We don't have any plans to do this at this point, but we'll continue to look at that," was his noncommittal response as quoted by the Journal.
Other Stocks Nearing $1,000
Google's parent company Alphabet Inc. saw its Class A Shares (GOOGL) close Friday at $993.27, while its Class C Shares (GOOG) closed at $971.47. Considerably less media attention is devoted toinsurerMarkelCorp. (MKL) at $967.57.
Already well beyond the $1,000 barrier are Class A shares of Warren Buffett's Berkshire Hathaway Inc. (BRK.A), which closed Friday at a breathtaking $248,524.00 each. The others are agribusiness companySeaboard Corp. (SEB) at $3,994.05, homebuilderNVR Inc. (NVR) at $2,285.63 and travel booking company The Priceline Group Inc. (PCLN) at $1,863.90. A recent article in MarketWatch discusses the 15 highest priced stocks.
Splits on the Decline
In 2016, only six companies in the S&P 500 Index (SPX) split their shares, versus 93 companies 20 years ago, and the tally so far in 2017 is only two, per data from Birinyi Associates cited by the Journal. Today the average S&P 500 stock trades above $98 per share, up from a range of $25 to $50 that lasted for decades, per the same sources. These figures are not adjusted for inflation, however. In any case, with more individuals investing through vehicles such as mutual funds and hedge funds, rather than via direct purchases of specific stocks, this is another reason for the increasing irrelevance of stock prices and stock splits. Institutional investors, meanwhile, dislike stock splits insofar as they pay brokerage commissions on a per-share basis, the Journal observes.
Buffett on Splits
Legendary investor Warren Buffett has been a longtime critic of stock splits, the Journal reports. However, even Buffett has found an occasional sound business reason for a split. Class B shares in Berkshire Hathaway (BRK.B), which closed Friday at $165.69, were split 50 to one in 2010 to facilitate the buyout of small shareholders in railroad operator Burlington Northern Santa Fe Corp.
Why Splits OnceMattered
Back when individual investors largely built their own equity portfolios, rather than through investment funds, there was an economic imperative to buy inround lotsof 100 shares. Transaction costs were proportionally higher forodd lotsof less than 100 shares, with an odd lot differential, typically an extra 1/8 point (12.5 cents) per share, charged in addition to regular commissions. Public companies saw an imperative to keep the price of a round lot within the reach of small investors, and thus split their shares when the price rose to significant heights. Splits themselves used to spur a slight increase in price, as buying interest increased once a round lot became less expensive.Today investors pay commissions as little as $10 per trade, and can buy or sell a single share without added charges, the Journal notes. Odd lot differentials are a thing of the past.
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