On Feb. 1, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) announced that its board approved a stock split that would see shareholders receive 20 shares of GOOG stock for every share currently held. Alphabet’s shares jumped on the news.
While there have been several high-profile stock splits in recent years, it is hard to know whether this is the beginning of a stock-split renaissance or merely an attempt by the company to be included in the Dow Jones Industrial Index.
Here is a look at both sides of the argument.
GOOG Stock and the Masses
As I said in the introduction, there have been some high-profile stock splits in recent years. One of the biggest was Apple’s (NASDAQ:AAPL). It did a 4-for-1 split on Aug. 31, 2020. Apple’s stock pre-split was trading around $500.
Since the split, Apple’s share price has gained 33.8% over 18 months, an average of 1.9% per month. The S&P 500 is up 24% over the same period. So, while Apple outperformed the index, it is unlikely that the split had anything to do with its gains.
Whenever a stock split involves a company with a share price in the hundreds or thousands, the media always drags out the argument that the company wants to make its shares more affordable for regular folk.
In the case of Google, its share price will drop from today’s value of $2,588 to around $130. A lot more people have $130 to spend on a whim than $2,600. So, theoretically, the argument makes sense.
However, in reality, the thesis doesn’t fly for two reasons.
Most Americans Don’t Own Stock Directly
The first reason is that most Americans own Google and other stocks through mutual funds and exchange traded funds (ETFs). According to The Motley Fool’s Jack Caporal, Americans’ direct ownership of stocks has not grown over the past 30 years. In 1989, 32% of American families owned stock, with 17% holding them directly. In 2019, 53% of American families owned stock, but only 15% held it directly.
So, the indirect ownership of stocks through mutual funds and ETFs has risen by 66% over the past 30 years, while direct ownership has fallen by 12%.
The second argument against this idea of delivering a cheaper stock to the masses is that it is already being done through fractional shares. Most brokers and financial technology firms now offer some version of the same concept.
In a 2020 article about the subject, The Washington Post quoted a 38-year-old cybersecurity expert’s reasons for using SoFi Technologies’ (NASDAQ:SOFI) Invest:
“‘I saw the market volatility, and I work at home anyway. But I didn’t have anyplace to go in my spare time, so the fractional shares provided me an opportunity to get in the market with a few dollars here and there,’ said Russell, who trades on SoFi. ‘I was able to get fractions of Amazon, Tesla and Zoom. I knew Zoom was going to be huge.’”
I wish fractional shares had been around when I was in my 20s. Then, I would probably have a lot more money saved through small incremental investments building into larger amounts.
The only benefit I can see from the split is that fractional share buyers can now get a bigger slice of a Google Class C share than before.
The Real Reason for Splitting GOOG Stock
I’ve followed Neil Macneale’s 2-for-1 newsletter for many years. It first was published in August 1996. Neil’s been publishing it monthly ever since. The 2 for 1 Index is a list of 25-30 equally weighted stocks that have recently split. He holds each stock for approximately 30 months.
I can tell you that Macneale has faced some lean months in recent years where there were very few stock splits, let alone from companies worth owning. For example, as Bloomberg pointed out in early February while covering Alphabet’s split, there were only two splits from the S&P 500 in 2019, compared to 47 in 2006 and 2007.
They have become a rarity in the markets.
While it is nice to think there will be a wave of stock splits in the years ahead, the reality is that a majority of Americans will continue to get their Alphabet fix through ETFs like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
We’ll probably never know the real reason for Alphabet splitting its stock 20-for-1 despite the investor-friendly talking point provided by Chief Financial Officer Ruth Porat that the split makes the shares more accessible.
One possible theory is that lowering the price to $130 from $2,600 makes it far more eligible to be included in the Dow Jones Industrial Average, which is price-weighted rather than cap-weighted.
As a result, the top stock in the index is UnitedHealth Group (NYSE:UNH) with a 9.04% weighting. Its share price is $463. The S&P 500, which is cap-weighted, has 27 stocks with a higher share price than UNH. Alphabet is one of those.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
