Summary
- Amazon announced a 20-for-1 stock split and $10 billion shares buyback.
- The company intends to make the stock more affordable for employees and increase its demand in the stock market.
- It would be wise to buy Amazon Stock now, but it makes no difference if you buy before or after the split unless you don’t want to buy at a higher price.
Amazon recently announced a 20-for-1 stock split and a $10 bn share buyback. The company intends to boost the stock price as it faces the challenge of high operating costs and other challenges such as staff retention. In Amazon’s 28-year history, this split makes it the fourth it will undertake. The last split it did was in September 1999. Amazon knows that the split will not change the company's fundamental value, but it hopes to spur investor optimism in the stock.
After the announcement on Wednesday, Amazon stock jumped by 7 percent and closed at $2785.58. The split will take effect from June 6 if shareholders approve it at May's Amazon annual general meeting. The Amazon board also approved a $10 bn share buyback along with the split. This approval comes in the heel of a 2016 authorization to buy back $5 bn shares, of which only $2.12 bn was repurchased. This is the company’s purchase of its shares since at least 2018. The share buyback does not have an expiration date.
The Value Of Share Buy Backs And Stock Splits To Shareholders
As the name implies, a share buyback is when a company repurchases its shares from the market using its cash. Since a company cannot be a shareholder, those repurchased shares are canceled or converted to treasury shares. The intention is to lower the number of shares available to the public, which would temporarily increase the value of each share.
Most notable about Amazon’s buyback announcement is that the company has been posting solid earnings reports since the pandemic. Therefore, it is making sure that shareholders gain from this increased earnings by giving them more value for their money. No wonder Amazon stock jumped after the announcement.
On the other hand, a stock split does not add any value to stock but increases the number of shares in circulation. For example, if one has a share of $100 and is split into 20 places in a stock split, each share would now be worth $5 apiece. So the actual value of a stock split is to make the stock affordable to the average investor. As a result, more investors will find the stock more attractive, increasing demand. This demand push will tend to increase the stock price further.
So, Should You Buy Amazon Stock Before The Split and Buy-Back?
Investors ask this question a lot: Whether it would be wise to buy Amazon stock before or after the split?
As noted above, a stock split is a vote of confidence by the board that the stock will continue to increase in value. Coupled with a buyback, it is leveraged onto the stock to make it more valuable. Amazon’s statement on the split was that it intends to “give its employees more flexibility in how they manage their equities in Amazon and increase the accessibility of the stock to people who are desirous of investing in Amazon.”
So because of this, it would be unwise to sell Amazon stock before the split. Now is the time to go bullish on Amazon stock because the value will continue to rise. If you are a small-time investor, it would be wise to hop onto the bandwagon before it begins to rise again.
It makes no difference if you buy before or after the split. But if you are in a hurry and do not want to wait until the price goes up after the split, now is the time to buy.
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