Google’s decision to split its $3,000 stock is stoking bets on inclusion into the Dow Jones Industrial Average, but a similar move by Amazon could make things complicated for index managers.
Google’s (GOOGL) – Get Alphabet Inc. Class A Report blowout fourth quarter earnings have shares set to open at a record high Wednesday, but the surge might be more related to what the tech giant did to entice a new class of investors than its impressive top and bottom lines.
Alphabet, Google’s parent company, unveiled plans for a 20-for-1 stock split, likely to take place in July, that would leave investors with one Google stock and a dividend payment of 19 more shares, all price at around $160 each (based on today’s opening bell price).
Google said earnings for the three months ended in December came in at a record $20.6 billion, or $30.69 per share, up 37.6% from the same period last year and well ahead of the Street consensus forecast of $27.48 per share. Group revenues were up 32.3% to an all-time high of $75.3 billion.
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Google shares were marked 10% higher in pre-market trading Wednesday to indicate an opening bell price of $3,027.00 each.
The decision to split the shares follows similar moves from Apple (AAPL) – Get Apple Inc. Report and Tesla (TSLA) – Get Tesla Inc Report over the past two years, making Google stock a more attractive and attainable proposition for retail investors who, powered by a wave of mobile trading apps and zero-commission brokers, suddenly find their collective power capturing the attention of the biggest companies in the world.
It also sets up the possibility of inclusion into the mother of all global indexes: the Dow Jones Industrial Average. The price-weighted Dow, which is managed by S&P Dow Jones Indices, attempts to smooth-out the vagaries of splits and dividends in its 30 stock collection through the Dow divisor, a number that represents the affect of a stock price change on the overall average.
At $3,000 a share, however, even a small price change in Google would be far too big a disruption for the average, which may explain why that it’s sitting on the outside looking in, despite its market-leading position in global e-commerce and its $1.9 trillion market cap.
That arithmetic changes at $160 a share, however and could set Google on a path for inclusion in the Dow, which is scandalously low on tech sector representation, later in the year.
But who would it replace?
International Business Machines (IBM) – Get International Business Machines Corporation Report seems the most likely target, with a market cap of just $122 billion and stock that’s fallen nearly 20% of the past five years. Intel Corp. (INTC) – Get Intel Corporation Report, at $200 billion, could also be a swap, as could Cisco Systems (CSCO) – Get Cisco Systems, Inc. Report, which has a market value of around $233 billion.
The move to swap out one of the tech old-guards is not without precedent: Apple knocked AT&T (T) – Get AT&T Inc. Report from its Dow perch in March of 2015, less than a year after the iPhone maker (now the biggest company in the world) unveiled a 7-for-1 stock split in June of 2014.
S&P Dow Jones Indices is not above turfing big-name stocks from its bellwether, either: Pfizer (PFE) – Get Pfizer Inc. Report got the boot in the summer of 2020, alongside Exxon Mobil (XOM) – Get Exxon Mobil Corporation Report and Raytheon RTX, to make way for Amgen (AMGN) – Get Amgen Inc. Report, Salesforce (CRM) – Get salesforce.com, inc. Report and Honeywell (HON) – Get Honeywell International Inc. Report.
That said, the index manager could have an even tougher decision to make if Amazon (AMZN) – Get Amazon.com, Inc. Report, which reports on Thursday, decides to follow its big tech peers with a split of its four-figure stock.
S&P Dow Jones Indices classifies Amazon as a consumer discretionary stock, while Google is considered communications services, but both would have a strong case for Dow inclusion given their industry dominance and planet-like influence on broader financial markets.
