Amazon announces 20:1 stock split and $10 Billion buyback

Amazon Stock split

Amazon has announced its first stock split since 1999 on Thursday in the ratio 20:1 with a $10 billion share buyback. The latest stock split will take effect on June 6.

Here are the details:

Amazon is the third major company to join the trend of coming up with share buybacks after tech majors  Apple and Alphabet. 

Does the stock split benefit the company?

  • According to BofA, splits are positive events for the companies. The average returns after the announcement are 25% in a year, compared with 9% for the overall market. The buyback news is also significant as Amazon’s previous repurchases gave its shares an average 12-month return of 100%.
  • Post the announcement on Wednesday, the share price closed 5.41% higher on Thursday as buyback drew more investors to the stock. The stock split and buyback are subject to shareholder approval at its annual shareholder meeting scheduled on May 25.

What is a stock split?

A stock split happens when the price of a company’s share increases considerably, making each stock very expensive for the retail investor. In a stock split, a company divides its shares to lower its price and increase the overall amount of shares available.

Why is Amazon splitting its stock?

Amazon said the split will make the split-adjusted share price more accessible for potential investors and will allow employees more flexibility in how they manage stock-based compensation. Amazon has adjusted their compensation practices to retain its top notch employees in high-demand fields, such as software engineering and other corporate jobs.

However, for Indian investors looking to buy Amazon shares, the stock split won't be of much advantage in terms of affordability. INDmoney app allows investors to buy fractional shares in US stocks. Hence, investors can buy Amazon shares for as less as Rs 100 through the App.  If you buy the stock before the split, your net investment in the company post-split (June 6) will continue to remain the same as discussed above.

Is buyback good news for investors?

Buyback, in general, is good news for investors as it shows the management's confidence in the business. It reduces the number of shares in the market, and individual ownership stakes become larger post buyback.

However, Amazon's share buyback may not impact the shareholders much. Here’s why:

  • The current buyback will replace the existing $5 billion authorization news that was in effect. The company has already bought $2.12 billion worth of shares.
  • The new announcement does not mention an expiration date. It means that the buyback can happen this year, next year, or may never happen.
  • The $10 billion is a small number compared to the market cap of Amazon which is over $1.4 trillion. The buyback is less than 1% of its shares.

Brokerage radar

The stock split could mean a positive trigger for the stock. All analysts have maintained a ‘Buy’ recommendation on the shares. Most have retained  their price targets. The consensus price of $4,000 per share implies a jump of more than 30% from current levels.