Alphabet stock split paves way for addition to Dow

A Google sign is pictured during the company’s presentation of a detailed investment plan for Germany outside the Google office in Berlin, Germany, on August 31, 2021.

Annegret Regards | Reuters

Alphabet announced a 20-to-1 stock split in its Q4 2021 earnings report on Tuesday – for all 3 classes of its stock.

Before the earnings report sent the shares up more than 8%, Alphabet’s A shares closed at $ 2,753. (These shares, which were the main share class for Google until 2012, are traded at a small premium compared to the newer C shares, which have no voting rights.)

Split-adjusted, that would equate to $ 137.64.

IBM’s closing price on Tuesday was $ 135.53. With IBM’s recent divestment of its managed infrastructure business, Kyndryl, and its data and analytics business for healthcare companies, Watson Health, Big Blue is shrinking. And even before the spin-offs, IBM was plagued by growth issues for years.

Could IBM be a candidate to be removed from the Dow? Maybe. If so, the index committee would look at a stock with higher growth potential like Alphabet.

The share split may allow that discussion to take place. For years, Alphabet’s high price made it impossible for the stock to be eligible in the price-weighted Dow Industrials. After the share split, Alphabet could theoretically be swapped with IBM without little influence on the index, as both are around the same share price.

Would Alphabet’s stock class situation complicate its eligibility? The index committee must decide on this.

It is also worth noting that while many investors think of Alphabet as a technology stock, S&P Dow Jones categorizes it in the Communications Services category for indexing purposes. However, IBM is a pure technology stock.

So trading with IBM for Alphabet would shake up the sector weights in the Dow – another factor that the committee should consider. It would probably be a convincing opportunity to give the under-represented sector of communication services more influence. According to the latest S&P DJ Indices Factsheet, the sector has a small weighting of 3.7% in the Dow (third lowest in the index at the moment) compared to 22.2% for Tech.

Compare that to the S&P 500, where Communication Services makes up 10% of the index, while Tech is 29%.

The last major technology company to join the Dow was Apple, which was added in March 2015 – just nine months after completing a 7-for-1 split, the fourth split in its history. (It has since completed another 4-for-1 split in 2020.)

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