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Why Alphabet should split its stock

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

Stock splits have become all the rage lately. Apple (NASDAQ: AAPL) jump started the trend with its unexpected decision to split its stock. Tesla (NASDAQ: TSLA) followed shortly thereafter with a split of its own.

With both Apple and Tesla having pulled the trigger, some investors expect that many other companies will do stock splits soon. Among the best candidates for a stock split would be Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Below you'll find several reasons why Alphabet should be the next to follow in Apple's and Tesla's footsteps.

1. Splitting one of Alphabet's share classes could draw a clearer distinction between the two

Alphabet has only done one stock split in its time as a publicly traded company, and it wasn't a typical split. In 2014, the search engine giant distributed one share of nonvoting stock for every share of voting stock that shareholders owned. That was equivalent to a 2-for-1 stock split in terms of economic impact, but the move was controversial. Many investors didn't like the idea of Alphabet's dual share classes, with one class of stock not getting any voting rights. Since then, the dual class structure has become almost commonplace, especially in the tech industry.

Doing a stock split with Alphabet's non-voting shares could bring their price down significantly while also making it easier to distinguish the voting and non-voting stock. That would make Alphabet similar to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), whose Class A shares are 1,500 times more valuable and have disproportionately greater voting rights than the cheaper Class B shares.

2. Alphabet should be part of the Dow

The Dow Jones Industrials (DJINDICES: ^DJI) just made the decision to switch out three of its components, so it's unlikely to make further moves anytime soon. Yet in many ways, Alphabet would make a better Dow member than the companies the average chose this time around. A stock split of around 10-for-1 would make including Alphabet in the price-weighted index much more feasible.

When the Dow kicked AT&T out of the average, it left Verizon as the sole company in the communication services business. Admitting Alphabet as a second such business would recognize the importance of the internet in communication services, and it would represent a much purer play than (NASDAQ: AMZN) and its consumer-facing e-commerce marketplace. Without a stock split, there's absolutely no chance of Alphabet ever joining the Dow Jones Industrials.

3. Alphabet shouldn't stick its neck out to regulators

Finally, highly successful companies like Alphabet have become lightning rods for lawmakers and regulators. Their arguments suggest that Alphabet and its peers have used their size unfairly. It's easy to point to the big gains in share price as a clear indicator of past success and current wealth.

One benefit that Apple and Tesla will get from their stock splits is that they'll no longer be so visible in the ascent of their share prices. Amazon thus far has chosen not to split its stock, and so it's a line of defense against Alphabet and its current price of about half of Amazon's. However, if Amazon were to do a stock split, it could leave Alphabet exposed. It'd be better for Alphabet to jump at the chance now and fall in line with its tech giant peers.

Anything could happen

Alphabet investors had almost no chance of seeing a stock split until Apple and Tesla decided to break the ice and make moves of their own. Now, it's much more likely that the FAANG stock  would consider splitting its shares. That wouldn't necessarily be important from a fundamental standpoint, but it could push Alphabet back into the limelight once again.

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

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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. Dan Caplinger owns shares of Alphabet (A shares), Apple, and Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), and Tesla and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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