Walmart‘s (NYSE: WMT) stock is splitting. The world’s largest retailer surprised investors on Tuesday by announcing a 3-for-1 stock split.
In recent years, stock splits have become associated with high-flying tech stocks like those in the “Magnificent Seven.” Walmart’s announcement is a reminder that stock splits can take place at any company at any time, even if the share price isn’t exceptionally high. Walmart shares closed Wednesday at $165.25, approaching an all-time high.
The split will be the retailer’s first since 1999, reflecting the fact that the stock has mostly struggled over the past 25 years. It fell behind Amazon and underperformed the S&P 500, even as the business has done well in recent years.
Walmart argued that the stock split was designed to encourage employees to purchase the stock. The company noted that more than 400,000 employees participate in the Associate Stock Purchase Plan. This allows employees to buy stocks through payroll deductions and benefit from a 15% match on the first $1,800 they contribute each year.
CEO Doug McMillon said of the decision: “Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates. Given our growth and our plans for the future, we felt it was a good time to split the stock and encourage our associates to participate in the years to come.”
Walmart’s stock will begin trading on a post-split basis on Feb. 26, and the split will increase shares outstanding from 2.7 million to 8.1 million.
What the stock split means for Walmart investors
Stock splits get a lot of attention in the media, especially when they happen at a big company like Walmart, but they don’t affect the fundamentals of the business in any way. While it may look like the stock is getting cheaper, the overall business size remains the same, whether measured by earnings, cash flow, or revenue.
The stock split won’t affect any of those valuation ratios. It will just split the proverbial pie of the company’s stock into more pieces, but investors will own the same percentage of the business that they did before.
Nonetheless, there is some evidence that stock splits correlate with a stock’s outperformance over the next year. This could be due to the momentum heading into the split as they typically come after substantial price gains or increased interest among investors. Walmart is clearly hoping that the move will encourage more buying among its employees, which could help push the stock higher.
Is Walmart stock a smart buy?
After being slow to embrace e-commerce in the early 2000s, Walmart has made significant strides in recent years, adding grocery-pickup stations at most of its stores and embracing the omnichannel retail model. It’s begun building out its own third-party e-commerce marketplace to compete with Amazon.
In most of the recent quarters, it has posted faster e-commerce growth than Amazon. At the same time, its grocery business, which makes up more than half of its revenue, has been able to withstand inflation and the pressure that consumer discretionary retailers have felt.
In the third quarter, the company reported 5% comparable-sales growth, excluding fuel, and adjusted operating income rose 3% to $3.5 billion. It also raised its adjusted earnings-per-share guidance for the year to $6.40-$6.48.
Operationally, Walmart looks about as strong as it has in a long time, but there’s a difference between a well-run business and a stock that’s a good buy. At a forward price-to-earnings ratio of 26, Walmart’s valuation is similar to the S&P 500‘s. At that price, investors are paying a lot for Walmart’s modest growth prospects.
Walmart is a safe stock that has a long track record of raising its dividend, but investors should understand that that’s what they’re paying up for. For the right kind of investor, Walmart is a smart buy. It’s a well-managed, dividend-paying recession-proof business. But if you’re looking for growth or a stock that can beat the S&P 500 by a wide margin, there are better stocks to own.
Should you invest $1,000 in Walmart right now?
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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. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
Walmart’s Stock Is Gravitating Toward an All-Time-High: Could a Stock Split Make It a Magnificent Buy? was originally published by The Motley Fool