Amazon’s (AMZN) – Get Amazon.com, Inc. Report first stock split in more than 20 years has shares in the world’s biggest online retailer trading sharply higher Thursday, and may also pave the way towards its inclusion in the Dow Jones Industrial Average.
The 20-for-1 split, which will begin trading in early June, will effectively reduce the cost of buying one of the most expensive stocks — at least in nominal terms — from just under $3,000 to around $145 each and open up purchase options for a host of retail investors.
But it may also solve one of Amazon’s most significant challenges: its surging wage bill. The group’s fourth quarter earnings were flattered by an $11.8 billion boost from Amazon’s stake in EV maker Rivian Automotive (RIVN) – Get Rivian Automotive, Inc. Class A Reportwhich formed the bulk of its $14.3 billion bottom line.
That’s not to say its dominant market position — a matter of concern for both US lawmakers and antitrust authorities on both sides of the Atlantic — didn’t produce an impressive levels of sales. Overall revenues rose 9% over the three months ending in December to a record $137.5 billion, while sales at Amazon Web Services soared 40% to a record $17.8 billion.
But the rub on that was the effort Amazon had to endure to fight through supply chain disruptions and rising input costs: Operating expenses were up 13% at $133.95 million, Amazon said, linked largely to labor and shipping increases.
Amazon said in October that it would hire 150,000 workers heading into the holiday season, with wages as high as $21 an hour, amid one of the most severe labor shortages in US history. Sign-on bonuses of up to $3,000 were also on the table, Amazon said, with the bulk of the new roles based in Arizona, California, Colorado and Florida.
CFO Brian Olsavsky had cautioned at the time that costs linked to hiring, inflation and other “operational disruptions” could rise to as high as $4 billion over the December quarter.
“As we mentioned in the last earnings call, we did see more than $4 billion in costs from inflationary pressures and lost productivity and disruption in our operations,” Olsavsky said late Thursday. “The inflation primarily relates to wage increases and incentives in our operations, as well as higher pricing from third-party carriers supporting our fulfillment network.”
Which is why the 20-for-1 stock split might have an ulterior motive for Amazon, and one that might have a more significant near-term impact that its inclusion in the Dow.
Amazon is the second-largest US employer, behind Walmart (WMT) – Get Walmart Inc. Report, with around 1.5 million Americans on its payroll. The vast majority of those, however, work for its logistics arm, either in warehousers or as delivery drivers, and earn wages that, despite recent increases, hover somewhere between $35,000 and $45,000 per year.
According to Gene Munster, managing partner at Loup Ventures, a lower priced stock will allow management to use share-based incentives, rather than outright wage increases, to boost overall pay and improve employee morale.
Workers will also be able to buy shares more easily, as a result of the split, allowing for further incentivization and higher levels of employee retention.
Amazon’s possible inclusion in the Dow can’t be ignored, either, now that S&P Dow Jones Officials can work with its $145 share price.
The price-weighted Dow 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 $2,900 a share, however, even a small price change in Amazon 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 $1.4 trillion market cap.
S&P Dow Jones Indices classified 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.
The same can be said for Google, whose parent company Alphabet unveiled plans for a 20-for-1 stock split last month, 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.
But who would could they replace?
International Business Machinery (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 Reportat $200 billion, could also be a swap, as could Cisco Systems CSCO, which has a market value of around $233 billion.
The move to swap out one of the tech old-guards is not without previous: 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 (EFP) – Get Pfizer Inc. Report got the boot in the summer of 2020, alongside Exxon Mobil (XOM) – Get Exxon Mobil Corporation Report and Raytheon (RTX) – Get Raytheon Technologies Corporation Reportto make way for Amgen (AMGN) – Get Amgen Inc. ReportSalesforce (CRM) – Get salesforce.com, inc. Postponement and Honeywell (HON) – Get Honeywell International Inc. Report.
Amazon shares were marked 4.8% higher in early Thursday trading to change hands at $2,919.30 each, a move that would leave the stock with a year-to-date decline of around 12.2%.
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