Stock splits don't change anything about the value of the underlying company. But many high-flying technology companies have used that approach to lower the per-share price of their stocks.
Costco Wholesale (COST 1.01%) may not be a sexy technology company, but investors who look for stock-split stocks should be keeping eyes on the value-oriented warehouse retailer anyway. That's because its shares have jumped 25% so far in 2023, and Costco might just be next company to split its stock.
Why splits matter
Well-known tech names, including Tesla and Apple, have performed stock splits in the last three years. More recently, others including Google parent Alphabet as well as Amazon have also split their stocks about a year ago.
While the stock split itself doesn't affect the value of the company, it can signal management's confidence in the underlying business. Executives don't want to split a stock and then see the share price decline. The longer-term results from Tesla and Apple reflect what management hopes to see.
Both have significantly outperformed the Nasdaq Composite index in the three years since those split events.
TSLA Total Return Level data by YCharts
Of course, many variables go into a stock's return over a several-year period. But if the underlying business is firing on all cylinders, a stock split can lower the share price to a level where more retail investors feel comfortable investing in the company.
Value, in good times and bad
Costco may not be a tech giant, but its business continues to grow with no signs of trailing off. The share price has responded with a nearly 25% jump this year through July. There's good reason for that when one looks at the underlying business. Sales exploded during the pandemic, and revenue has continued to grow this fiscal year.
For example, in the first nine months of Costco's fiscal 2019 (ended May 12, 2019), the company reported total revenue of $105 billion. Three years later, that grew nearly 50% to $155 billion. And sales, membership fees, and earnings continue to grow nicely. For its most recently reported nine-month period ended May 7, 2023, Costco surpassed $3 billion in membership fees, helping total revenue increase to more than $163 billion.
Those results show that consumers want the value that Costco offers through various economic cycles. When the economy recovered from the pandemic impacts, shoppers didn't abandon Costco. Rather, membership continues to grow, and that should contribute to even higher sales in the future.
Multiple benefits for shareholders
That's why management got approval from the board of directors to reauthorize a $4 billion share repurchase plan earlier this year. That comes after the company spent $1.4 billion to repurchase shares using a previously authorized plan. Management has also had the confidence to more than double the quarterly dividend payment over the last five years.
While Costco's dividend recently yielded a modest 0.7% annually, the company has also been more generous to shareholders with occasional special dividend payments, the most recent one being a $10-per-share special payout in late 2020.
Stock splits can also be considered shareholder friendly by giving retail investors a share price potentially less intimidating than the more than $560-per-share recent stock price. While investors can buy fractional shares at many brokerages now, many investors aren't aware of that or just prefer whole share amounts.
It's been more than 20 years since Costco last split its shares, but it would make some sense for another one in the near future. Investors should focus on the underlying business that is going strong, but a decision to split the stock would be considered another show of confidence from Costco management.
