The increased attention on stock splits over the past couple of years has also increased attention for several stocks trading at higher nominal prices, including Costco Wholesale (COST 0.17%). As their stock prices have increased over time, several prominent companies have chosen to split their stocks. Some investors are wondering if Costco is next.
Costco continues to grow sales volume and expand in almost any economic environment. But since Costco stock has generally moved higher with that growth, Costco management may want to give added consideration to factors that might make a stock split advantageous.
Costco is likely to keep expanding long term
Costco as a company is operating with more tailwinds than headwinds. Admittedly, Costco's market may appear saturated, at least in the U.S. It has opened warehouses in 46 U.S. states and serves every large metropolitan area in that country. But U.S. expansion is unlikely to level off anytime soon.
So far in fiscal 2022 (which ends at the end of August), 10 of the company's 18 new stores (not including relocations) were in the U.S. Moreover, two of the new U.S. stores were Costco Business Centers. Business Centers offer products that cater directly to restaurants, offices, and other commercial establishments. Costco has opened 24 of these stores in the U.S., and most are west of the Mississippi River. Hence, this will likely serve as an additional opportunity for new stores in large U.S. metros.
Costco's international stores account for 259 of its 833 locations. These non-U.S. stores are in 11 countries across four continents, meaning Costco has barely scratched the surface of its non-U.S. potential. So the potential for long, sustained growth is definitely there.
Some interested investors need added incentives
Costco's stock price right now is probably a little daunting for some retail investors. Someone adding regular small amounts to a brokerage account each month is likely getting just partial shares when buying this stock, which can seem disappointing for some. While a stock split doesn't intrinsically add any value to the company by itself, an appropriate level of splitting would likely make whole shares available to more potential shareholders.
The price has become so daunting because the company has performed so well to this point and because investors see the potential for sustained growth. As a result, Costco continues to post higher valuations when measured versus earnings. Its current price-to-earnings (P/E) ratio of 41 is higher than rivals such as Walmart at 26 times earnings and Target at a 12 P/E ratio. Investors see that relatively higher P/E and it sparks a little hesitation. Splitting the stock won't change the P/E ratio, but a lower per-share price can make it easier for some investors to look past the fact that the stock is not trading at a comparable valuation to its rivals.
Interested Costco investors should also be aware that the P/E multiple has fallen amid improved revenue and earnings. For the first nine months of fiscal 2022, revenue of $155 billion rose 16% compared with the same timeframe in 2021. During that period, net income surged 19% to $4 billion as slower growth in selling, general, and administrative expenses made up for considerable increases in merchandise costs. Such earnings growth could mean you're missing out by not owning Costco despite the higher P/E ratio.
Will Costco split its stock?
Costco's 2-for-1 split in January 2000 was its last stock split. Since that time, Costco stock has risen by around 1,000%, a possible indication that the time has come for such a move.
So far, Costco management has given investors no indication that it is planning a stock split. Management for consumer stocks such as Booking Holdings and AutoZone have resisted stock splits despite having much higher nominal share prices than Costco. Costco management could easily choose to follow their lead.
Nonetheless, the retail environment is struggling right now with inflation and a slowing economy, and many companies are looking at every option for keeping investor interest in what is becoming a more challenging economic environment. A stock split might provide a psychological boost Costco needs to move higher in such times.
