Software giant Microsoft(NASDAQ: MSFT) has a long history of stock splits. Its share count has been reshuffled nine times so far, and a single share from 1987 would be a basket of 288 Microsoft stubs today.
But Microsoft's latest stock split took place in February of 2003. It's been three decades, and the stock is starting to look pricey. Many investors expect a tenth split fairly soon, especially since Microsoft is a member of the prestigious and price-weighted Dow Jones Industrial Average(DJINDICES: ^DJI) index. Allowing the share price to soar much higher might inspire the index managers to drop Microsoft from the component list and pick a lower-priced name instead.
Or so the thinking goes. Is there any substance to that argument, though?
How important is Microsoft's Dow membership?
Being a member of the Dow index is a rare badge of honor. There are thousands of stocks on the American market but only 30 get to call themselves "Dow stocks" at any given time. Dropping out of popular indices like the Dow Jones Industrial Average or the S&P 500(SNPINDEX: ^GSPC) can be embarrassing. Some investors may sell their shares due to lower confidence in the stock's long-term prospects.
That being said, the market effects of joining or leaving a major index tend to be temporary. That membership card doesn't make the holder immune against downturns and market changes. In fact, the Dow often lags behind broader market trackers like the S&P 500 or the Russell 3000 in the long run:
So the Dow membership a matter of honor, not a business-boosting asset of material value. Still, holding on to that index seat could be important enough to force Microsoft's hand. If nothing else, it would look silly if the second-largest stock by total market value lost its Dow door pass due to a simple accounting quirk.
Dow prices are going up
At the same time, I'm not so sure that the S&P Global(NYSE: SPGI) committee that manages the index list will ask Microsoft for a stock split quite yet.
First and foremost, a Dow stock with a $420 share price isn't that outrageous anymore. UnitedHealth(NYSE: UNH) and Goldman Sachs(NYSE: GS) have even higher stock prices; Home Depot(NYSE: HD) and Caterpillar(NYSE: CAT) are just a few dollars behind. Microsoft's beefy stock price accounts for just 6.6% of the Dow's total value today. The average and median prices on the Dow are both roughly $200 per share.
In other words, high share prices are not an automatic ticket out of Dowsville. Microsoft is an extra-important name on the list, but not a tyrant with an outsized influence over the index value.
Moreover, the Index Committee isn't forced to kick out Microsoft's stock even if it continues to soar. The group picks 30 names among "some of the largest U.S. companies," taken from the S&P 500 index. Their discussions are always confidential and the committee has the freedom to "revise index policy" as needed. And even then, they can make exceptions from the revised rule book. If the team of five S&P Global and Wall Street Journal representatives wanted to bend the rules to keep Microsoft on the list, they would certainly have that power.
Stock splits are not expensive
So Microsoft could keep its share count stable for the foreseeable future without harming the company, the stock, or its investors.
At the same time, there isn't much of a downside to taking the stock-split plunge. Microsoft's accounting team might put in some overtime to get the paperwork done, but the actual move wouldn't cost much.
The stock exchanges do charge higher fees for a larger share count, but those fees are capped at a few hundred thousand dollars per year. There would be no change in Microsoft's case, and it's just a rounding error in the company's earnings reports anyhow.
Microsoft might not split its stock anytime soon
Against that backdrop, I don't expect Microsoft to announce a stock split in 2024 or 2025. The company could surprise me and make the move anyway, but it's no big deal. Stock splits don't create investor value and I showed you why the Dow membership issue probably won't force Microsoft's hand.
And the company is doing business in software and computing -- not in maintaining a specific stock price or being a Dow Jones member. Investors should weigh Microsoft's stock value against its business prospects, not an arbitrary accounting move.
Should you invest $1,000 in Microsoft right now?
Before you buy stock in Microsoft, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $716,988!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 30, 2024
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Home Depot, Microsoft, and S&P Global. The Motley Fool recommends UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
