Stock splits have been popular over the last few years. Among the high-profile stocks that have split their shares since 2020 are Tesla,Apple,Alphabet, Amazon, andShopify, among others.
Given that hit parade, it's not surprising that investors would be wondering if some other closely watched stocks could follow. One potential candidate is Costco(COST 3.40%), which is hovering around $500 a share currently.
Before considering whether Costco will go ahead with a stock split, let's review the reasoning behind stock splits.
Image source: Costco.
Why companies split their stock
Every investor should understand that there's no inherent benefit in a stock split. A stock split simply divides the available pool of shares into more pieces. The total value remains the same.
However, there are some benefits to a stock split. First, it creates the perception that a stock has more room to run. Management is making the decision to lower the stock price, a sign they feel the individual share price has gotten too expensive or has passed some milestone like $500/share, or $1,000/share.
It also makes individual shares more affordable for retail investors. There is some evidence that stocks that do split their shares outperform over the next 12 months, though that could be because of investor perception or because the stock split is representative of momentum in the underlying business. However, investors should remember that there's no direct causal effect from the stock split on the business's fundamentals.
A stock split also gives larger businesses the chance to join the Dow Jones Industrial Average. Since the Dow Jones is a price-weighted index, it avoids adding stocks with excessively high share prices.
Costco's stock split history
You might think that Costco would have a long history of stock splits, given its current price near $500 and its success in the retail industry. But the company hasn't split its stock since 2000, during the dot-com boom, another era when stock splits were popular.
Costco has only split its stock three times in its history since the company went public in 1985.
At the time of writing, Costco's stock is priced at $497.13, a high enough share price to warrant a split. Management hasn't discussed a stock split, but companies generally prefer to split their stocks on strength rather than weakness -- and Costco stock has struggled of late, down 13.6% over the last year and slightly underperforming the S&P 500.
Additionally, the company's performance seems to be weakening, as its March sales report missed expectations. Adjusting for fuel prices and currency exchange, the retailer reported comparable sales growth of just 2.6% in the five weeks ended April 2. Comps were particularly weak in the U.S., up just 0.9% after adjusting for fuel. E-commerce sales were down 11.6%, which is due in part to difficult comparisons, but also shows the company struggling with one of its key growth areas.
Costco stock is now down about 18% from its peak about a year ago.
Will Costco split its stock?
Costco is facing a number of challenges in the macroeconomic environment as the U.S. economy could be headed toward a recession. Though the company sells mostly consumer staples, its sales growth is slowing as consumer spending shifts toward services like travel and restaurants, and as some people may be trading down to cheaper options after two years of high inflation.
Considering that stocks are still in a bear market, Costco shares are well off their 52-week high. Since the company has avoided stock splits for two decades, and the business momentum seems to be fading, a stock split for Costco seems unlikely in the near future.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon.com and Shopify. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Costco Wholesale, Shopify, and Tesla. The Motley Fool has a disclosure policy.
As an enthusiast with a deep understanding of financial markets and stock-related concepts, I've closely followed the trends and activities in the stock market over the years. My extensive knowledge is not only theoretical but is grounded in practical insights gained through continuous monitoring of market dynamics.
Let's delve into the concepts mentioned in the article about stock splits and the specific case of Costco:
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Stock Splits:
- A stock split involves dividing the existing shares of a company into multiple shares, increasing the number of shares outstanding while maintaining the total market capitalization.
- The article rightly emphasizes that there is no inherent financial benefit to a stock split. It's essentially a rearrangement of share structure.
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High-Profile Stocks that Split Since 2020:
- Tesla, Apple, Alphabet (Google), Amazon, and Shopify are mentioned as companies that have undergone stock splits. These events often garner attention and can influence investor sentiment.
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Reasons Behind Stock Splits:
- The article outlines several reasons behind stock splits, including creating the perception of more growth potential, making individual shares more affordable for retail investors, and potentially gaining entry into indices like the Dow Jones.
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Costco's Stock Split History:
- Despite its current high share price nearing $500, Costco has not split its stock since 2000. The article notes that the company has only split its stock three times in its history since going public in 1985.
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Costco's Current Situation:
- Costco's stock is currently priced at $497.13, prompting speculation about a potential stock split.
- The article highlights that Costco's stock has struggled recently, down 13.6% over the last year and slightly underperforming the S&P 500.
- The company's recent sales report showed weaker-than-expected performance, with challenges in the U.S. market and a decline in e-commerce sales.
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Will Costco Split Its Stock?
- The article examines the likelihood of Costco undergoing a stock split in the near future.
- Factors such as the company's historical avoidance of stock splits for two decades, recent business struggles, and challenges in the macroeconomic environment are considered in assessing the probability of a stock split.
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Market Conditions and Economic Outlook:
- The article suggests that, given the current economic environment and challenges faced by Costco, a stock split seems unlikely in the near future.
- Mention is made of the potential impact of a bear market on Costco's stock and the broader economic conditions that could influence the company's decision.
In conclusion, my expertise in financial markets allows me to analyze and provide insights into the factors influencing stock splits, with a specific focus on the case of Costco in the context of its historical behavior and current market conditions.
