Sometimes, big companies do things that receive a lot of attention but don't really matter all that much. Other times, though, they do things that go largely unheralded but are truly important.
I think that Amazon.com (AMZN 0.87%) is a perfect example of this. Earlier this month, the company announced a 20-for-1 stock split. This created considerable excitement, especially since Amazon's move came on the heels of a similar stock split announced by Alphabet in February.
But Amazon isn't only planning to conduct a stock split. Here's what the internet giant is doing that's even better.
Image source: Amazon.com.
Doubling down
The stock split was only part of Amazon's 8-K "current report" filing on March 9, 2022. Amazon also revealed that its board of directors authorized a stock buyback of up to $10 billion.
Some companies routinely announce stock buybacks, but not Amazon. The last time the company's board authorized the repurchase of shares was back in 2016. That seems like nearly a lifetime ago, with all that's happened since then.
Amazon's board also doubled down on buying back the company's shares. In 2016, the repurchase of up to $5 billion was authorized.
This decision comes at a time when Amazon's share price is close to its all-time high. The stock currently trades at a whopping 56 times expected earnings (although that's on the low end of Amazon's valuation historically).
Why it's better
Why is Amazon's stock buyback better than its stock split? It's a much more concrete move to help shareholders.
Granted, the 20-for-1 stock split will make Amazon stock more affordable for retail investors. However, the stock split doesn't actually change Amazon's valuation in and of itself. It's like splitting a pizza that originally had four slices into 80 slices. There's still the same amount of pizza.
A stock buyback, on the other hand, reduces the number of outstanding shares. This makes the remaining shares worth more. To use the pizza analogy, a buyback causes everyone's slice to be larger.
Sure, $10 billion only represents around 0.6% of Amazon's current market cap, and that's not anything to get overly excited about. But I agree with my Motley Fool colleague Jeremy Bowman that the combination of Amazon's expanded stock-buyback program with the stock split could signal a change in philosophy that could lead to further actions that unlock shareholder value.
Legendary investor Warren Buffett fully understands the power of stock buybacks. In his most recent letter to Berkshire Hathaway shareholders, he wrote that repurchasing shares "is the easiest and most certain way for us to increase your wealth." What's true for Berkshire could also be true for Amazon.
When will Amazon buy?
There's one big question about Amazon's share repurchase program: When will the company actually buy any shares? Amazon's board didn't establish a timeline for using the $10 billion recently authorized. The company stated that it will be able "to repurchase its shares opportunistically from time to time when it believes that doing so would enhance long-term shareholder value."
Amazon only bought back $2.12 billion of its stock under the previous $5 billion authorization. That isn't a lot of buying, considering the previous program lasted for roughly six years. If Amazon doesn't act on its current buyback authorization, there won't be any benefit for shareholders.
I suspect, though, that the four words no one wants to say will be applicable: This time is different. It wouldn't be surprising if Amazon buys back some shares after its stock split in June. That could "prime the pump" a bit to encourage other investors to buy the stock.
It's also possible that the company could buy some of its shares even sooner. Amazon is scheduled to announce its first-quarter results in April. It could post a hefty net loss because of the negative impact of its investment in electric-vehicle maker Rivian.
Savvy investors won't let a disappointing bottom line distract them from Amazon's strong underlying business. If Amazon does report a large loss due to its Rivian investment, chalk it up as one of those things big companies do that garner a lot of attention but don't matter much.
