Chasing the Dow

Big Tech has chalked up non-stop victories over the last decade, but if the U.S. tech complex had to find one disappointment, it would have to be that the market's most exclusive club, the Dow Jones Industrial Average, has continued to exclude three of its most important members. Apple and Microsoft are in the 126-year-old index, but the last time the Dow admitted new members, it chose Salesforce.com over Alphabet, Amazon.com, and Facebook.

To be fair, this is mostly a numbers game. The Dow still uses a rather archaic formula to calculate its price. Instead of weighting the index by overall market value, the Dow looks at per-share stock prices. That means a company with a high stock price of, say, $1,000 has 10 times the impact on the Dow's value as a company with a price of $100. It makes no difference that the $100-per-share company may have 10 times as many shares outstanding and thus be worth the same as the $1,000-per-share company. 

In deciding which companies to include, the Dow committee has to consider not only the companies most representative of the economy, but also the absolute value of their shares. It can't admit a $1,000-a-share stock because it would overwhelm the index. 

So why share all this? Because tonight, in reporting its strong quarterly earnings, Google-parent Alphabet said it was splitting its stock 20-for-1. Based on the split, Alphabet, which closed the day at $2,753 a share, will trade for roughly $138 a share. 

There's no fundamental reason to split a stock. It's like cutting a pizza pie into 16 slices instead of eight -- you still have the same amount of total pizza. But a split does make sense for one main reason: You want into the Dow.

Yes, there's an argument that retail investors prefer lower-priced shares so they can buy even lots of stock, but brokerage firms now offer fractional ownership, meaning that if you give a broker $1,000, it delivers however many shares that buys, even if it's half a share. Splits are as obsolete as ticker tape.

But the Dow factor is still real, and Alphabet's move could spur a Big Tech split parade, according to my colleague Andrew Bary. He writes tonight: 

The action could prompt Amazon.com to consider a stock split given that its shares trade at $3,023 a share. Amazon hasn’t split its stock since 1999. A call on an Amazon split likely would be made by chairman and founder Jeff Bezos.

Amazon reports earnings on Thursday.