Investing on Wall Street comes with its ups and downs. Although 2023 has been a banner year for optimists, this entire decade has been nothing short of a roller-coaster. We've witnessed two bear markets (2020 and 2022) and a seemingly unstoppable bull market that took all three major indexes to new all-time highs less than two years ago.
When volatility picks up on Wall Street, investors have a tendency to seek out tried-and-true outperformers. Over the past couple of years, companies enacting stock splits certainly fit the bill.
Image source: Getty Images.
A stock split is an event where a publicly traded company alters both its share price and share count by the same magnitude, without having any impact on its market cap or operating performance. It's a purely cosmetic change that can make a company's nominal share price more affordable for everyday investors, as with a forward stock split, or can increase its share price to maintain minimum listing standards on a major exchange, as with a reverse stock split.
Most investors pay close attention to companies conducting forward stock splits. If a company is reducing its share price, there's a good chance it's a highflier that's outperformed its competition on both an operating and innovative basis. Since July 2021, eight high-profile stocks have conducted stock splits (listed in chronological order):
- Nvidia (NVDA +2.13%): 4-for-1 split in July 2021
- Amazon (AMZN +0.70%): 20-for-1 split in June 2022
- DexCom (DXCM +3.16%): 4-for-1 split in June 2022
- Shopify (SHOP +3.25%): 10-for-1 split in June 2022
- Alphabet (GOOGL +0.56%)(GOOG +0.45%): 20-for-1 split in July 2022
- Tesla (TSLA +1.91%): 3-for-1 split in August 2022
- Palo Alto Networks (PANW +0.60%): 3-for-1 split in September 2022
- Monster Beverage (MNST +0.88%): 2-for-1 split in March 2023
The $64,000 question is: Which publicly traded companies are next to join this illustrious group of stock-split stocks?
At the moment, one high-flying stock stands out as a surefire candidate to become the next stock-split stock. Meanwhile, two other widely owned outperformers, which are seemingly long overdue for a split, have very good reasons to avoid becoming the next stock-split stock.
The logical next stock-split stock: Costco Wholesale
If there's one publicly traded company that makes for the most-logical stock-split candidate, it's warehouse club Costco Wholesale (COST 0.69%). Although Costco has split its shares three times (not including its spin-off of Price Enterprises in 1994) since becoming a public company, it's been 23 years since it last made its shares more nominally affordable for everyday investors. Shares ended at just shy of $563 on Aug. 11, 2023.
NASDAQ: COST
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The reason shares of Costco have powered higher by more than 1,000% (not including dividends paid) since the company's last split in January 2000 has to do with its array of competitive advantages. Over the very long-term, these competitive edges are likely to lift Costco's shares even more.
For example, Costco's size and deep pockets allow it to purchase goods in bulk. Typically, the more of a product it buys, the lower the per-unit cost. Costco is able to pass along these cost-savings to its members, especially in grocery aisles. This helps it consistently undercut major grocery chains and local shops on price, which is a big lure to attracting new customers and retaining existing members.
Selling low-margin groceries is just one way Costco's operating model thrives. Each of the company's warehouse clubs contains an assortment of discretionary goods that sport substantially higher margins than groceries. If consumers just buy a handful of these discretionary items, Costco's operating margin moves higher.
But at the heart of Costco's success is its membership program. Consumers and businesses paying $60 or $120 annually for a membership is a high-margin revenue channel that gives the company even more room to undercut its peers on pricing. Plus, paying for a membership makes it likelier that consumers will choose Costco over other local stores. After all, members are going to want to get the most bang for their $60/$120 annual fee.
Costco Wholesale splitting its stock and making shares more nominally affordable would almost certainly ignite interest in a company that's well-known among everyday investors.
NYSE: UNH
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Highflier No. 1 that has good reason not to be the next stock-split stock: UnitedHealth Group
However, a high share price doesn't guarantee that a publicly traded company is going to split its stock. Healthcare company UnitedHealth Group (UNH +1.31%), whose shares closed at $508.01 on Aug. 11, serves as a prime example.
Although UnitedHealth Group has split its stock on five previous occasions as a public company, it hasn't done so since the end of May 2005. One factor, in particular, makes it highly unlikely that UnitedHealth's board will seek a split: its inclusion in the Dow Jones Industrial Average (^DJI +0.82%).
The Dow Jones is a 127-year-old index comprised of 30 historically profitable, time-tested, multinational businesses. But unlike the other major indexes, the Dow is a share price-weighted index. In other words, the higher a component's share price, the more influence it holds within the Dow Jones Industrial Average. UnitedHealth Group's $508 share price is, by far, the highest in the Dow, which gives it the most sway within the index. The company's board would be wise not to lose this distinction.
But just because UnitedHealth Group's stock is unlikely to split, it doesn't mean its share price can't head even higher. Though its health insurance segment is prone to higher payouts from time to time, the company's premium pricing power is actually quite strong. Sustained mid-single-digit growth for UnitedHealth's insurance segment has pretty much become the expectation.
What's arguably even more exciting is Optum, the company's considerably faster-growing healthcare services subsidiary. Optum is composed of three segments that handle everything from pharmacy services to the software healthcare institutions rely on. The generally higher operating margin associated with Optum is what has the potential to lift UnitedHealth Group's earnings per share by a double-digit percentage each year.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Highflier No. 2 that has good reason not to be the next stock-split stock: Berkshire Hathaway (Class A)
The other high-flying stock that's virtually guaranteed not to split, even though it's seemingly decades overdue for one, is conglomerate Berkshire Hathaway (BRK.A +0.60%)(BRK.B +0.59%), the company run by billionaire CEO Warren Buffett. Specifically, I'm talking about the Class A shares (BRK.A), which have never split and would set an investor back a cool $542,900, as of Aug. 11.
As long as Warren Buffett is running Berkshire Hathaway, it's a virtual certainty that the Class A shares won't be split. We know this, because the Oracle of Omaha plainly told investors so during the company's 1995 annual shareholder meeting. For context, this is the same year that Berkshire announced its intent to create its Class B shares.
Despite Buffett referring to Berkshire's Class A share price as "awkward to disadvantageous" in 1995, he also noted that if a stock split were performed "we are almost certain we would get a shareholder base that would not have the level of sophistication and the synchronization of objectives with us that we have now." The Oracle of Omaha also opined that Berkshire's Class A share price and the company's intrinsic value would be out of sorts if a split were introduced, "because then people would think about other possibilities that might give the stock a temporary boost."
NYSE: BRK.A
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Even though stock splits are off the table at Berkshire Hathaway, it hasn't stopped Berkshire's Class A shares from gaining close to 4,400,000%, in aggregate, since Warren Buffett became CEO. Buffett's love of dividend stocks, cyclical businesses, and his penchant for portfolio concentration, have all played key roles.
In particular, dividend stocks have a knack for handily outpacing the returns of non-paying companies over multidecade periods. In 2023, Berkshire Hathaway is set to collect north of $6 billion in dividend income.
Likewise, packing the company's investment portfolio with cyclical stocks allows Buffett and his investing team to take advantage of long-winded economic expansions and bull markets. Even though bear markets are an inevitable part of the investing cycle, the typical bull market has lasted 3.5 times longer than the average bear market, since September 1929.
