Consumers are used to "every day low prices" from retail chain Walmart (WMT -0.08%). Now investors will get a taste of lower prices for Walmart stock as well.
On Jan. 30, Walmart announced that it will conduct a 3-for-1 stock split after the market closes on Feb. 23. This means that for every share investors own on Feb. 22, they will receive two additional shares after the split is complete.
For those with less experience in the stock market, this might sound like a sure-fire way to triple your money. However, that's not how stock splits work. Alas, investing is never that easy.
Stocks represent businesses and these businesses are divided up into many shares. Each share represents fractional ownership of the business as whole. Take Walmart for example: It has around 2.7 billion shares, as of this writing. Investors who own one share of Walmart, therefore, own a minuscule piece of the business.
When companies split their stocks, as Walmart will do next month, it simply changes the share count. Rather than having 2.7 billion shares, Walmart will have about 8.1 billion shares. However, this doesn't change the value of Walmart's business. This means that each share will represent a smaller percentage of the business and will consequently be worth less.
Therefore, investors shouldn't expect to triple their money when Walmart executes its 3-for-1 stock split. The overall value of their investment will stay mostly unchanged. They'll own three times as many shares but each share will be worth roughly one-third of what it used to be worth, evening everything out.
This doesn't necessarily mean that Walmart's 3-for-1 stock split is entirely irrelevant for investors. To the contrary, Walmart's reasoning for doing its stock split is quite interesting and worth exploring.
Fostering an ownership mentality
Walmart stock trades at $166 per share, as of this writing. But investors with less than $166 can still invest thanks to fractional shares. With fractional shares (allowed by many brokerages), investors can invest a dollar amount rather than buying a specified number of shares.
However, Walmart's management believes it's important for its associates to be able to buy whole shares rather than fractional shares. CEO Doug McMillon harkened back to the company's founder by saying, "Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates."
Walmart allows more than 400,000 of its workers to participate in a stock-purchase plan. These workers, if they choose, can automatically invest a portion of their paycheck into Walmart stock. And the company will match 15% for the first $1,800 per year, which works out to a $270 bonus annually.
When more Walmart employees buy Walmart stock, it's good for business in theory. After all, by investing in the stock, employees become part owners of the business. The job is consequently more than just this week's paycheck; workers' long-term personal finances are tied to the company. Therefore, employees who own Walmart stock have a vested interest in seeing the business succeed.
This is why investors should consider insider ownership when researching stocks to buy. It's not a guaranteed way to find winning investments. But it's comforting to find companies where insiders own a lot of shares because their financial interests are aligned with common shareholders.
What should investors do now?
Stock splits are headline-grabbing events that have excited investors in recent years. And Walmart's upcoming stock split could foster more of an ownership mentality with some of its workers, which is important. That said, investors should never lose focus on the business itself.
When it comes to Walmart's retail business, it's as stable as they come. The company has more than 10,000 stores and it just grew its same-store sales by 4.9% in the third quarter of 2023, propelling its trailing-12-month revenue to an all-time high.
Moreover, Walmart is exploring some growth opportunities that have gone unnoticed by many investors. Specifically, the company is quickly growing its advertising business and has partnered with advertising-technology company The Trade Desk in this.
Walmart's e-commerce rival Amazon has generated $44 billion in advertising revenue over the past year. Therefore, the potential for a big advertising business is there.
These are the kind of business things that Walmart shareholders should be most concerned with more than stock splits, even if the latter is more exciting at the moment.
