Amazon makes its case to join the Dow

A coming stock split sets the stage for the e-commerce and cloud computing giant.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The stock market continued to suffer declines on Thursday, and as we've seen many times in the recent past, the Nasdaq Composite (NASDAQINDEX: ^IXIC) proved to be more volatile than most other stock market indexes. As of noon ET today, the Nasdaq was down 247 points, or nearly 1.9%, to stay just over the 13,000 mark. That's not quite 20% below its all-time high, but it hardly indicates for certain that the bear market is over.

Gaining ground today, though, was Amazon (NASDAQ: AMZN). The e-commerce giant represents a big part of the Nasdaq, and its latest announcement suggests that the company might be making its move to persuade the index managers at S&P Dow Jones Indices to admit Amazon as one of the 30 stocks in the Dow Jones Industrial Average.

Time to split?

Shares of Amazon had risen more than 5% on Thursday by midday. The company made a couple of moves that should arguably not have a huge impact on the stock. In reality, though, investors saw the announcement as a positive sign.

Amazon's first strategic move was to authorize a 20-for-1 stock split. That will require an amendment to its certificate of incorporation, which in turn will require shareholder approval at the company's May 25 annual shareholder meeting.

If approved, investors can expect Amazon stock to start reflecting its split-adjusted price starting on June 6. Shareholders should get credited with the 19 extra shares for each share they currently own on or around June 3. 

The other thing Amazon put into place was a massive $10 billion stock repurchase program. The authorization from the Amazon board allows for purchases through open-market transactions or with entities in private negotiations.

One thing that investors should remember, though, is that just because a company authorizes a buyback doesn't mean that it will necessarily happen. Indeed, Amazon said that the new $10 billion program will replace an existing $5 billion program from 2016, and it had only repurchased $2.12 billion in stock in that six-year span.

Could Amazon join Alphabet in the Dow?

The news is interesting because it follows a 20-for-1 split announcement from fellow tech giant Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) just over a month ago. Like Amazon, Alphabet had long had an extremely high price above $2,000 per share, and the announced split would take its per-share price down to the $130 to $150 range.

Stock splits have no impact on the intrinsic value of the company, as each new share will have a price of roughly a 20th of its old price. But a lower stock price would allow S&P Dow Jones Indices to consider inviting Amazon to join the Dow Jones Industrials. The price-weighted index counts on its constituent stocks having similar share prices in order to avoid disproportionate influence from a small set of stocks.

To make room for Amazon, the Dow would need to expel one of its current components. With relatively low prices, Intel (NASDAQ: INTC) and Cisco Systems (NASDAQ: CSCO) would be potential candidates in the tech arena.

Alternatively, given the fact that Amazon straddles the internet-retail and the communications-infrastructure industries, replacing companies like Verizon Communications (NYSE: VZ) or Walgreens Boots Alliance (NASDAQ: WBA) might be potential options as well.

When large companies like Amazon and Alphabet aren't part of the Dow, it makes the venerable market benchmark seem out of touch. These stock splits could change that, and it'll be interesting to see if S&P Dow Jones Indices gets the hint. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Dan Caplinger owns Alphabet (A shares), Alphabet (C shares), and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Alphabet (A shares), Amazon, Cisco Systems, and Intel. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Alphabet (C shares) and Verizon Communications and has recommended the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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