Despite Wall Street's enthusiasm about them, stock splits are largely non-events for a business. They don't change the underlying value of the company but merely boost the outstanding share count while reducing the per-share price. It's akin to slicing a pizza: You generate more pieces but don't have any more food.
But splits do make a stock more affordable for investors seeking to establish their first position in a company. That's one good reason why demand might rise around a split announcement.
Walmart (WMT -0.08%) is a great example. Thanks to a 3-for-1 split in late February, you can buy this dividend giant for around $60 per share instead of nearly $180 a few days earlier. And just a few hundred dollars will allow you to accumulate several shares in this industry-leading retailer.
Good news
The chain had plenty of good news to share with investors in its most recent earnings update. Revenue in the Q4 period rose 6%, which is a great result for a company that books over $600 billion in annual revenue.
Look behind that headline figure and you'll see more reason for optimism. Walmart's growth into early 2024 was powered by a healthy 4% customer traffic spike as average spending stayed roughly flat. In other words, its price-leadership approach is working well.
Other Q4 highlights included the retailer's crossing of the $100 billion milestone in its e-commerce segment, which expanded by 23% for the year. It's great news for the business that Walmart can boost traffic and stores even as it makes the digital pickup and delivery channels more convenient to shoppers.
Higher margin
Walmart isn't known for having a high profit margin or for boosting profitability over time. That's due to the competitive nature of the consumer-staples retailing niche. But a few factors have combined to shift that narrative in a positive direction lately. Walmart is getting more advertising sales, for one, and is increasing efficiency for its stores as well thanks to booming demand for delivery and grocery pickup.
COST Operating Margin (TTM) data by YCharts
You can see the impact of these gains in the rising gross profit margin. Bottom-line adjusted operating profit rose 13% in Q4, too, to more than double the rate of Walmart's sales increase. The chain's operating margin is back north of 4% of sales now, compared with Costco Wholesale's 3% rate.
The price is right
As mentioned, Walmart's lower price following the stock split isn't a reason to view the stock as especially cheap. You'll still pay about the same premium for this business on a price-to-sales and price-to-earnings basis as you would have before the split took place.
But Walmart still looks attractive compared with its industry peers right now. Shares are priced at about 0.7 times sales, or nearly half of Costco's premium. Its dividend yield is much higher as well, at 1.3%, compared with Costco's 0.6%.
Walmart recently increased its payout by 9%, marking an unusually large raise. But given the chain's surging cash flow and rising profitability, there could be more big increases ahead over the next several years.
As a result, you'll probably be happy to have Walmart stock in your portfolio as you patiently collect dividends and automatically reinvest them in accumulating additional shares. Using that strategy, even a small initial investment can grow much larger over several decades.
