Stock splits have been popular over the last few years. Among the high-profile stocks that have split their shares since 2020 are Tesla, Apple, Alphabet, Amazon, and Shopify, among others.
Given that hit parade, it's not surprising that investors would be wondering if some other closely watched stocks could follow. One potential candidate is Costco (COST +1.85%), which is hovering around $500 a share currently.
Before considering whether Costco will go ahead with a stock split, let's review the reasoning behind stock splits.
Image source: Costco.
Why companies split their stock
Every investor should understand that there's no inherent benefit in a stock split. A stock split simply divides the available pool of shares into more pieces. The total value remains the same.
However, there are some benefits to a stock split. First, it creates the perception that a stock has more room to run. Management is making the decision to lower the stock price, a sign they feel the individual share price has gotten too expensive or has passed some milestone like $500/share, or $1,000/share.
It also makes individual shares more affordable for retail investors. There is some evidence that stocks that do split their shares outperform over the next 12 months, though that could be because of investor perception or because the stock split is representative of momentum in the underlying business. However, investors should remember that there's no direct causal effect from the stock split on the business's fundamentals.
A stock split also gives larger businesses the chance to join the Dow Jones Industrial Average. Since the Dow Jones is a price-weighted index, it avoids adding stocks with excessively high share prices.
Costco's stock split history
You might think that Costco would have a long history of stock splits, given its current price near $500 and its success in the retail industry. But the company hasn't split its stock since 2000, during the dot-com boom, another era when stock splits were popular.
Costco has only split its stock three times in its history since the company went public in 1985.
At the time of writing, Costco's stock is priced at $497.13, a high enough share price to warrant a split. Management hasn't discussed a stock split, but companies generally prefer to split their stocks on strength rather than weakness -- and Costco stock has struggled of late, down 13.6% over the last year and slightly underperforming the S&P 500.
Additionally, the company's performance seems to be weakening, as its March sales report missed expectations. Adjusting for fuel prices and currency exchange, the retailer reported comparable sales growth of just 2.6% in the five weeks ended April 2. Comps were particularly weak in the U.S., up just 0.9% after adjusting for fuel. E-commerce sales were down 11.6%, which is due in part to difficult comparisons, but also shows the company struggling with one of its key growth areas.
Costco stock is now down about 18% from its peak about a year ago.
NASDAQ: COST
Key Data Points
Will Costco split its stock?
Costco is facing a number of challenges in the macroeconomic environment as the U.S. economy could be headed toward a recession. Though the company sells mostly consumer staples, its sales growth is slowing as consumer spending shifts toward services like travel and restaurants, and as some people may be trading down to cheaper options after two years of high inflation.
Considering that stocks are still in a bear market, Costco shares are well off their 52-week high. Since the company has avoided stock splits for two decades, and the business momentum seems to be fading, a stock split for Costco seems unlikely in the near future.
