Stock splits often happen when a stock's price gets high enough that management feels inclined to lower it to make it more accessible to a wider pool of investors. If a stock is trading at hundreds or thousands of dollars, investors who aren't able to buy fractional shares may not be able to own the stock. But with stock splits, companies can reduce their share prices, thus making them a useful tool for that purpose.
One prime stock split possibility that investors may be wondering about is Costco Wholesale (COST 0.92%). At around $730 per share, it's one of the more expensive stocks on the S&P 500. It may only be a matter of time before management decides to deploy a stock split. Here's what it could take.
What do recent stock splits tell us?
A company doesn't need to deploy a stock split. It's an optional move that ultimately means nothing for investors who own the stock -- they'll just end up owning more shares at a lower average price, but their overall investment value will remain unchanged.
But let's take Chipotle Mexican Grill as an example. The popular casual restaurant chain recently announced a mammoth 50-for-1 stock split. Trading at nearly $3,000 per share, the stock can split at such a high basis that even after the split, it will still be trading at more than $50.
A few years ago it was tech companies that were eager to jump on the stock-splitting hype. In 2022, Alphabet announced a 20-for-1 stock split. Amazon followed suit a month later with its own 20-for-1 split announcement as well.
Two things that stand out to me are that these companies have been opting for nice, large, round numbers, and they are careful not to make their stocks look too cheap afterwards. Alphabet and Amazon both trade at more than $100 today. Apple did a more modest 4-for-1 split in 2020, but part of the reason it didn't do a bigger split was probably because it wanted to keep its price around $100 afterwards -- at the time of the announcement, it was trading close to $400.
NASDAQ: COST
Key Data Points
The price may not be high enough for Costco to do a split
Now let's turn back to Costco. Here's what its stock price would look like after various stock-split ratios, assuming the stock is around $730 at the time the split occurs.
| Stock Split | Costco Post-Split Price |
|---|---|
| 20-for-1 | $36.50 |
| 15-for-1 | $48.67 |
| 10-for-1 | $73.00 |
| 7-for-1 | $104.29 |
Calculations by author.
If it were to do a 20-for-1 stock split, that would put its price at less than $40. That's well below what tech stocks have aimed for, and even below Chipotle's likely future price point. Even on a 15-for-1 basis, Costco's stock would be at slightly less than $50. Only on a 7-for-1 basis would its share price stay above $100.
Costco could do a modest stock split and not go for a round number, but this is Costco, a company that's not known for doing anything small, or even selling anything small. When it paid a special dividend last year, it was a whopping $15 per share -- more than three times its annual dividend rate.
I don't think Costco is going to hold out forever. But I don't think it starts to consider a stock split until the stock price hits at least the $1,000 mark, which would be a great achievement. And at that point, a 20-for-1 split would leave the stock at around $50.
But even that might be too low for Costco. Again, this is the company that likes to go big. And if it can't do a big stock split, it just might not do one at all.
Costco is still a fantastic long-term buy, regardless of what it does
For investors, if Costco splits its shares or not doesn't matter. This is still a remarkable business that has generated $249 billion in revenue over the trailing 12 months, with profits totaling $6.8 billion.
The company still has a lot of growth in its future, and while its earnings multiple may seem high at around 50 times its trailing profits, for buy-and-hold investors looking for an investment they can hang onto forever, Costco is a terrific growth stock.
