Pasteleosa: Alphabet stock split may trigger retail buying, Dow inclusion

The Google logo is pictured at the entrance to the Google offices in London, Britain January 18, 2019. REUTERS/Hannah McKay/File Photo

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NEW YORK, Feb 2 (Reuters) - Alphabet Inc's (GOOGL.O) 20-for-1 stock split puts it on course to follow other major companies that have executed similar moves in recent years.

The Google parent's share price soared 7.5% on Wednesday after it reported record quarterly sales along with the share split. read more

Other megacap peers that have undertaken stock splits since 2020 include Apple (AAPL.O), Tesla (TSLA.O) and Nvidia (NVDA.O).

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after stock split announcement

Between 2017 and 2021, S&P 500 companies executed 26 stock splits, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Though a company may decide to split its stock for various reasons, a cheaper price may make the shares more appealing to some investors, analysts said.

Peng Cheng, head of machine learning strategies at JP Morgan, said stock splits in general have a "psychological effect."

"One would much rather spend $100 and own 100 shares, than to own 0.1 share," Cheng said. "We observe lower retail participation in high-priced stocks than low-priced stocks."

Retail buying surged in the wake of both the Apple and Tesla stock split announcements, analysts at Vanda Research said. When Apple announced its 4-for-1 split in July 2020, retail investors went from purchasing less than $150 million in Apple stock each week to nearly $1 billion, according to Vanda.

After Tesla's 5-for-1 split announcement in August 2020, retail buying jumped from $30 million-$40 million per week pre-announcement to over $700 million a few weeks later.

"Alphabet’s announcement will almost certainly end up increasing retail investors’ activity in the stock," Vanda analysts said in emailed comments to Reuters.

Aside from Alphabet, there are another 27 stocks in the S&P 500 with share prices above $500, notes Bespoke Investment Group. However, stocks splits have become "less and less common" over the past 20 years, according to Bespoke.

From 2001 to 2007, the median number of S&P 500 stock splits was 35 in a year, according to Bespoke. From 2008 through last year, that number is down to only nine.

For Alphabet, analysts said the stock split could pave the way for its addition to the Dow Jones Industrial Average (.DJI). By reducing its stock price from roughly $3,000 now to $150 a share, Alphabet would make its stock more palatable for the 30-member Dow, which is a price-weighted index, meaning that high-priced stocks have an outsized influence.

"A 20:1 stock split may bring more retail investors into the stock and could help set the stage for inclusion into the DJIA," UBS analysts said in a research note.

Changes to the blue-chip Dow industrials are made on an "as-needed" basis and can be made at any time "in response to corporate actions and market developments," according to S&P Dow Jones Indices.

"While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors," according to a methodology document for the Dow Jones averages that also said stock price is a factor when considering a company for inclusion.

Alphabet's share rise on Wednesday lifted its market value near $2 trillion, which would put it in elite company with Apple and Microsoft (MSFT.O). Because Alphabet alone has a greater-than-4% weight in the benchmark S&P 500 (.SPX) and well over 7% weight in the Nasdaq (.IXIC), its climb on Wednesday helped support those indexes, which in January posted their biggest monthly drops since March 2020.