A stock splitting its shares is generally a positive sign that the company (and its stock) is doing well. Splits don’t change the actual value of an investor’s holdings in a company, they just divide the holding into smaller pieces. But at a lower price point, a stock may become more accessible and attractive to a wider pool of investors. It’s also indicative of a stock’s success; stocks that split their shares normally do so because their prices are high.
However, not doing a stock split doesn’t necessarily mean a stock has been doing poorly. Costco Wholesale (NASDAQ: COST) stock currently trades around the $700 mark. The company could easily split its shares and still be priced fairly high.
Is a stock split likely for Costco in 2024?
Costco’s last stock split was in 2000
The last time Costco management enacted a stock split was back in early 2000 when the warehouse club retailer split shares on a 2-for-1 basis. There were a few other splits in the 1990s, but nothing in more than two decades.
If the company were to execute a stock split this year, it would likely split by even more than just 2-for-1, as that would still put the stock at a relatively high price of $350. A 7-for-1 split, for instance, would put it at around the $100 mark. There are no hard and fast rules about what the resulting share price should be from a split, but a look at splits by other companies in the past several years indicates that aiming for $100 a share is popular.
A high stock price doesn’t mean a split is inevitable
While Costco is among the highest-priced stocks on the S&P 500, there are stocks even higher priced that haven’t done stock splits. Shares of Chipotle Mexican Grill trade at more than $2,300, while homebuilder NVR has a stock price of more than $7,400. A high price alone isn’t enough of a reason to suggest that a stock split is inevitable. Neither Chipotle Mexican Grill nor NVR has ever completed stock splits in their history.
Ultimately, what it comes down to is management and its preferences. Warren Buffett’s Berkshire Hathaway has two classes of shares — its original Class A, which is priced at more than $550,000 today and has never split, and Class B, which is more modestly priced and trades at around $370 and has split a couple of times since it was launched in 1996. But, other than the price, there is next to no real difference in owning the shares.
Why Costco probably won’t do a split this year
If Costco were going to do a stock split, it probably would done so in 2022 along with the many other big-name stocks that initiated splits, including Amazon, Alphabet, and Tesla.
That year Costco’s stock also reached highs of around $600, and there arguably would have been more of a reason to do a split back then, when stock splits were attracting a lot of attention from investors. Costco’s reluctance to split its shares back then suggests to me that it’s not going to do one anytime soon.
Costco is doing well where it matters most — the bottom line
In an era where fractional shares are more easily accessible, stock splits shouldn’t matter to investors. What is important is how the business performs, and in Costco’s case, the company’s financials remain impressive. In its most recent quarter (ended on Nov. 26, 2023), Costco reported $57.8 billion in revenue, which grew at a rate of 6% year over year. Earnings of approximately $1.6 billion increased by 16%.
Costco’s strong customer loyalty and brand make it among the best growth stocks to buy and hold for the long term. The company has done well under a myriad of economic conditions over the past few years, demonstrating its overall strength and versatility.
While Costco’s stock isn’t a cheap buy, trading at nearly 50 times its trailing earnings, with continued growth and many opportunities for expansion internationally, this has the potential to be a solid investment for years to come, regardless of the higher-than-average share price.
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John Mackey, former 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. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, Chipotle Mexican Grill, Costco Wholesale, NVR, and Tesla. The Motley Fool has a disclosure policy.
Is Costco Due for a Stock Split in 2024? was originally published by The Motley Fool