Stock Split Watch: Is Costco Next?

Costco (COST -0.24%) investors anxiously await the next earnings report. Investors may hope that release will bring a membership price increase, which has not happened in five years.

However, investors may want to focus on something that has not happened in 22 years -- a stock split. But they should understand the advantages and drawbacks of a split before deciding whether that would help Costco stock.

The case for a split

One does not have to extensively research Costco or its stock to see it as a stock split candidate. At over $500 per share, it is among the more expensive stocks in terms of nominal price.

Moreover, the stock price has reached that level due to its long-term performance. It has generally headed higher since it began trading in December 1985 at a split-adjusted $1.67 per share. Over its time on the market, it has handily outperformed the S&P 500.

This includes store expansions. As of the end of October, it claimed 842 stores across four continents. And despite its presence in 46 states, it holds the potential to add warehouses in mid-size markets as well as business centers.

Internationally, Costco has successfully adapted its business model to different cultures, avoiding the more notable failures of rival Walmart and maintaining a significant pace of net sales growth, regardless of the markets it enters.

Source: Costco 2022 10-K.

If it maintains its growth pace, one has to assume the stock price will eventually climb into the four figures and beyond without a split. This would put whole shares out of the reach of small investors and make Costco ineligible for an addition to the Dow 30, a price-weighted index.

Reasons to not consider a stock split

Nonetheless, for all the excitement surrounding stock splits, they change nothing on the surface. One share worth $500 holds the same value as 10 shares valued at $50 each. Hence, the move neither adds nor subtracts value from shareholders.

Moreover, not splitting a stock can bring with it a certain level of prestige. If one pays $500 for a share of Costco, it carries a sense of value that $5 per share or $50 per share stocks do not have.

Former Costco shareholder Warren Buffett seems to agree. The A shares of his Berkshire Hathaway conglomerate now sell for around $470,000 per share.

Buffett's partner Charlie Munger has also sat on Costco's board since 1997. It remains unclear whether Munger has used his influence to resist a split. Still, he continues to reiterate his confidence in the warehouse retailer.

Additionally, valuation and not price was likely the reason Buffett sold his Costco shares in the third quarter of 2020. At that point, the price-to-earnings (P/E) ratio was nearing 50, and again, Costco did not need low share prices to reach such a multiple.

Should Costco split its shares?

Considering both sides of the argument, Costco should consider a split. While the high price can carry prestige, a split could bring positive attention, at least if Alphabet's and Amazon's splits were any indications. Moreover, purchases by small investors and interest from indexes like the Dow would probably boost overall share demand.

That said, Costco has offered no indication it would split its stock. Instead, investors are more likely to receive news of a membership fee increase. That added revenue could become a blessing in disguise regardless of whether Costco splits its stock.