Online services giant Alphabet (GOOG 9.96%) (GOOGL 10.22%), the parent company behind the powerful Google and Android brands, just announced a 20-for-1 stock split. This is the first ordinary stock split in the company's history, reducing stock prices from nearly $3,000 to approximately $150 per share.
And it's no big deal. Stock splits may sound exciting, but they don't really matter in the grand scheme of things.
Let me explain.
First, a quick history of Google/Alphabet stock splits
Technically speaking, the company now known as Alphabet has executed one stock split in the past -- but it was not the garden variety expansion of the outstanding share count that we're seeing this week.
The company created a whole net class of stocks on March 27, 2014, by issuing new Class C shares to holders of Class A and Class B stock at the time. This was a controversial idea when it was first proposed in 2012, involving a shareholder lawsuit that was settled on the eve of a scheduled trial in 2013.
As a result of that settlement, the introduction of Class C shares was then followed by a $522 million adjustment payment a year later, calculated as 20% of the average volume-weighted price difference between Class A and Class C shares in the preceding 21 days. Half a billion dollars may sound like a lot of money, but it was distributed across an existing market cap of roughly $370 billion, which works out to a 0.1% dividend-style payment.
That was the end of Alphabet's stock split history until a new chapter was added this week.
What's new?
Shareholders of record as of July 1 will see a special dividend two weeks later, adding 19 new shares per existing stub in their holdings. This split affects all Alphabet share classes equally -- the nonvoting Class C stock, the single-vote Class A shares, and the insiders-only Class B shares with 10 votes each.
The split is subject to shareholder approval of a motion that accommodates the new share count, but that approval is pretty much automatic. Alphabet's founders and insiders control 59.7% of the vote through their Class B holdings alone.
Image source: Getty Images.
What's the big deal?
As mentioned above, the larger share count will lower the price of each share. But you still arrive at the same total market value for the company, for each share class, and for each shareholder's personal holdings either way. You're just multiplying one-twentieth of the old share price with 20 times as many shares, which cancels out in the end. No market value is created or destroyed here.
Now, stock splits used to have one important function. Lowering the price per stub in this fashion can put the stock within reach of smaller investors who might need to save up for months before picking up a single share of a $3,000 stock.
The times, they are a-changing'
But even that utility is going away these days. Interactive Brokers (IBKR -1.01%) introduced trading of fractional shares in November 2019, and many trading platforms had followed suit within the next year. This option is not available everywhere quite yet, but the industrywide expansion of fractional-share trades continues much like the earlier transition to trades without trading fees.
So if you only have $150 to invest this month, your broker may very well let you buy one-twentieth of an Alphabet share (Class A or Class C). You could always open a new account with a broker that does support fractional-share trades, in the increasingly rare case that your current investment platform doesn't have it yet. Or you could wait until mid-July, when Alphabet's stock prices suddenly drop to a more comfortable level so you can just pick up an entire share instead.
Any way you go about it, you'll eventually be the proud owner of one full Alphabet share, having paid roughly $150 for that privilege. Yes, I think that's a good idea, with or without stock splits along the way. Alphabet is one of my favorite investments for the long haul.
