Following Chipotle and Nvidia, is Costco Potentially the Next Company to Implement a Stock Split (Worth Paying Attention To)?
In recent times, stock splits are making a comeback. The last 15 years have seen a robust bull market, resulting in top-performing stocks trading at sky-high prices. Companies are now embracing stock splits to simplify gifting stock options to employees and make share buying more affordable for small investors. Notable examples include Amazon, Nvidia, and Chipotle, amongst others.
Investors often believe that stock splits increase a company's value. The idea is that a lower price per share, coupled with a larger total number of shares, somehow cheapens the stock. But is this notion grounded in reality? Let's examine Costco (COST) to scrutinize this perception and determine whether it's wise to buy before a potential stock split announcement.
Costco's flavorsome milestone approaching
Costco's stock has surged approximately 650% over the past five years, recently surpassing the $900 mark. If it edges up by a little over 10%, it will reach the $1,000 milestone. Costco's well-established low-price membership retail model has propelled it into becoming one of the United States' largest corporations, boasting a $400 billion market cap.
Its remarkable 150,000% total return since its initial public offering 40 years ago includes dividend reinvestments, making it one of the best-performing stocks in history. For longtime investors, an initial $1,000 investment would now be worth an impressive $1.5 million.
Costco has implemented two stock splits due to its soaring stock price in 1993 and 2000. With just a slight price increase, it may be close to enacting another split. Historically, when a stock reaches or surpasses $1,000, management teams tend to split the stock to make it accessible to investors with modest assets and to provide more flexibility in rewarding employees with smaller stock allotments.
Notable companies such as Chipotle, Nvidia, and Broadcom have executed stock splits around the $1,000 mark. Given its trajectory, it appears that Costco might be overdue for a split.
A thriving enterprise at a premium cost
Transcending stock splits, let's consider Costco's business health. During its most recent quarter ending in May, revenue increased 9.1% year-over-year to reach $57.4 billion. Revenue growth was robust across the board, particularly internationally, where same-store sales surged by 8.5% due to gasoline price adjustments. E-commerce growth also remained robust, climbing by 21% in the quarter.
Internationally, Costco presents a promising growth landscape. For instance, a recently-opened store in Okinawa, Japan, experienced a five-hour queue on its opening day, underscoring the strength of its brand overseas. Management has also recently increased the annual membership fee, justifying the premium membership price hike to $130 from $120.
Although the business is flourishing, Costco's stock is trading at a high premium valuation. Its price-to-earnings (P/E) ratio currently stands at 56. Despite its value being much smaller 10 years ago, its average P/E rate over the past 10 years is 35, suggesting that its current valuation is close to an all-time high.
Source: YCharts
Does a stock split warrant a stock purchase?
Before leaping at the idea of investing in Costco due to a potential stock split, consider this: A stock split is largely inconsequential for anyone other than Costco employees excited about the opportunity to receive more flexible stock options. In the context of today's investors, a stock split is an irrelevant factor, regardless of the higher number of shares it could potentially provide.
This is particularly relevant if you take fractional trading into account. With fractional share trading, investors can buy less than a single share when the price is high, just like with Costco.
The most impactful aspects to consider when evaluating a potential investment are the company's operations and its stock valuation based on earnings potential. Costco is an undeniably successful business, but its current valuation is somewhat inflated. Given its extensive revenue base, Costco's growth rate is likely to decelerate by 10-20 years, which means investors should be cautious about investing at its current price.
In conclusion, while a stock split could attract additional investor interest and potentially boost trading activity, it does not fundamentally impact the company's value. Instead, investors should focus on evaluating Costco based on its business performance and reasonable valuation.
After considering Costco's remarkable growth and high valuation, some investors might question the need for another stock split. However, historical data shows that companies like Chipotle, Nvidia, and Broadcom have implemented stock splits around the $1,000 mark, indicating a potential trend.
In the world of finance, many investors view stock splits as a way to make shares more affordable for small investors or to simplify gifting stock options. But as we've seen with Costco, a stock split does not inherently increase a company's value or warrant a stock purchase. Instead, it's essential to examine a company's operations, revenue growth, and stock valuation based on earnings potential before making an investment decision.
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