Will Tesla Finally Put an Auto Stock Back in the Dow?

A coming stock split could be just what it takes for Elon Musk to get into the prestigious Dow 30.

A coming stock split could be just what it takes for Elon Musk to get into the prestigious Dow 30.

The stock market is nothing if not tenacious. On Monday, investors got another reminder of how critical it is not to let their long-term investment strategies fall by the wayside. After having fallen sharply early in 2022, stock markets have powered back, and the Dow Jones Industrial Average ( ^DJI 0.27% ), Nasdaq Composite ( ^IXIC 0.00% ), and S&P 500 ( ^GSPC 0.71% ) have reached their best levels in roughly six weeks.


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Data source: Yahoo! Finance.

The Dow Jones Industrials have traditionally included some of the giants of American industry, and for much of their early history, the average lived up to its name by focusing largely on industrial and manufacturing giants. Time has caused the Dow to evolve to include stocks from a much broader array of industries, though, and for more than a decade, there haven’t been any automakers represented among the 30 stocks that make the Dow’s cut. With the latest news of a stock split from Tesla ( TSLA 8.04% ), however, some believe that might be about to change.

Trillion-dollar Tesla keeps climbing

Shares of Tesla finished Monday up more than 8%. That pushed the electric vehicle (EV) pioneer’s market capitalization above $1.13 trillion, cementing CEO Elon Musk’s status as the richest person in the world.

Red Tesla Roadster on a desert road.

Image source: Tesla.

Tesla announced that it would seek authorization at its annual meeting of shareholders to do a stock split. Shareholder authorization is necessary because the company’s articles of incorporation specify a limit to the number of outstanding shares Tesla can have, and so effectuating the split would require more shares than Tesla is currently allowed to have.

Nowhere in Tesla’s filing with the U.S. Securities and Exchange Commission (SEC) did Tesla give the ratio it intends to use for its split. However, some believe that it may use the same 5-for-1 ratio that it used when it previously split its shares in August 2020.

Will the price be right?

The split ratio is essentially meaningless in terms of the actual value of the company. A higher ratio just means more shares worth less per share.

However, the ratio is extremely important if Tesla wants to become part of the Dow. The Dow Jones Industrial Average is a price-weighted benchmark, and Tesla’s current share price of nearly $1,100 per share would give it such disproportionate weight in the Dow that it would be impractical. However, a 5-for-1 split would bring Tesla’s share price to around $220, and that would be quite consistent with several other current Dow components.

Tesla isn’t the first company to raise speculation about some big changes to the Dow. Both Alphabet and Amazon.com announced future stock-split plans earlier this year, and the ratios they chose would potentially put an invitation to the Dow within reach for them as well.

Still, Tesla has something that both Alphabet and Amazon lack: a tie to the Dow’s industrial roots. With the Dow kicking out General Motors upon its filing for bankruptcy in 2009, adding Tesla would help the Dow return to its automotive roots but with its 21st century EV twist.

It’ll take several months for all these stock splits to sort themselves out. In the meantime, investors can expect plenty of share-price volatility amid speculation of a potential invitation to the Dow Jones Industrials.

Read this article on Motley Fool

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