- Alphabet (GOOG, GOOGL) is doing a 20-for-1 stock split on July 15.
- Smaller investors will be able to buy more GOOG stock then, but fractional shares are still an option before then.
- Investors shouldn’t wait until after the split to buy shares.
It’s been almost two months since Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) announced it will split GOOG stock on a 20-for-1 basis. On July 15, shareholders will get 19 additional shares for every share held in the $1.8 trillion company. But, of course, Alphabet’s valuation won’t change.
What will change is the number of shares outstanding. That will increase 20-fold to 13.2 billion from 661 million today. In addition, the share price will fall to 15% of the closing price on July 14.
In early March, I suggested Alphabet would finally get an acquisition right by buying Mandiant (NASDAQ:MNDT) for $5.4 billion. The move adds immediate value to the company’s cloud business.
Alphabet remains one of the best tech stocks to own for the long haul.
| GOOG | Alphabet | $2,805.51 |
GOOG Stock Would Bring Dow Jones to Life
One of the arguments made for why Alphabet and other high-priced stocks should split is to qualify for inclusion in the Dow Jones Industrial Index. The DJIA, unlike the cap-weighted S&P 500, is price-weighted. So, the larger your share price, the higher your weighting in the index.
Barron’s published an article on March 10 that listed $100 as the sweet spot for gaining admission to the Dow. It pointed out the 30 stocks in the index varied in price, from UnitedHealth Group (NYSE:UNH) at the high end around $486 and Intel (NASDAQ:INTC) at the low end around $48.
Alphabet argued it was doing the split to make its shares more accessible to retail investors. However, in an age of fractional shares, the need to do so has mostly disappeared. There is no question about it: Alphabet is trying to get a place in the Dow.
As Barron’s argued, it’s likely Alphabet and Amazon (NASDAQ:AMZN), which announced its 20-for-1 split on March 10, will get into the Dow. They’ll replace tech stocks Intel and Cisco Systems (NASDAQ:CSCO), which are up 34% and 64%, respectively, over the past five years. Over the same period, GOOG and AMZN are up 233% and 282%, respectively.
Undoubtedly, Alphabet and Amazon would liven up the index that’s been around since 1885.
You Don’t Have to Wait to Buy Alphabet
Virtually every major online broker provides fractional share purchases these days. So, you don’t need to wait to buy a tiny sliver of the company. But many analysts don’t seem to know this, as seen in a recent report by InvestorPlace’s William White on the Amazon stock split.
Morgan Stanley’s Brian Nowak likes it. He thinks, much like Alphabet, that “it will open the stock up to a larger range of investors,” White wrote on March 10. Another analyst high on the move is BofA Global Research’s Jared Woodard, who seconds Nowak’s view that an increase in share count will accelerate buying.
The other two analysts White mentions like the split because it will increase the share repurchases companies make. Amazon is buying back $10 billion as a result.
Clearly, none of these analysts have ever bought fractional shares. If they had, they’d know it doesn’t matter to retail investors whether they buy one share or 20 for their $2,700 investment. Their ownership stake remains the same.
Yet, as Barron’s stated in February, other companies will rush to do the same thing to reach more of the so-called “retail” investors. It’s a total smokescreen by the Alphabets of the world — an opportunity to engage investors of any kind.
Buy GOOG Stock on the Dip
Alphabet’s share price is down 3% year-to-date through March 24. Yet Alphabet generated $67 billion in free cash flow (FCF) in 2021, 56.4% higher than a year earlier. Moreover, its FCF margin is 26% while its current FCF yield is 3.7%. That’s high for a company growing its FCF by more than 50% a year.
As I stated in early March, Alphabet doesn’t make a lot of large acquisitions — only seven out of 246 have been for more than $1 billion. So the fact it’s spending more than $5 billion on Mandiant suggests it’s getting very serious about protecting its Google Cloud customers.
Most of its valuation metrics at the moment are reasonable relative to its history. Trading at 7.3x sales and 24.2x earnings, these ratios are either at or below their five-year averages.
I like Alphabet as a long-term play. If you’re thinking about buying GOOG stock, I wouldn’t wait until July to own it.
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.
