Motley Fool - Thu Feb 29, 6:45AM CST
Walmart (NYSE: WMT) surprised many investors when it announced a stock split in late January. Stock splits are most common when share prices are nearing over $1,000, not when a stock trades for around $175 (pre-split).
But Walmart gave a great reason for splitting its stock:
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.
Having employees own stock gives them a sense of ownership, making them perform better. This is logical thinking, making me think of another commerce giant that may be splitting its stock soon: Costco (NASDAQ: COST).
Like Walmart, Costco may split its stock to assist employees
Costco hasn't split its stock in a while. Its last split came in January 2000, when the stock traded for a pre-split price of about $100.
With Costco's stock trading for around $740, it's far above the range at which it last split its stock. However, Costco may be enticed to follow suit with Walmart splitting its stock.
Costco is a great example of a company that values its employees and regularly scores high on the best places to work. With a similar business splitting its stock so its employees can own shares, this is something that Costco employees may request.
Additionally, Costco's previous CFO, Richard Galanti, is leaving after 40 years at the company. New CFO Gary Millerchip may look to make his mark by splitting the stock.
These are two real factors that could cause Costco to split its stock, although stock splits are mostly cosmetic. Nothing changes with the underlying business when a stock split occurs, but it does open stock ownership to new investors if they do not have access to fractional shares. This can cause a bit of a buying frenzy and bid the stock up in the short term.
Over the long term, it doesn't make much difference -- only business execution does. Fortunately for investors, Costco has been great in this area.
Costco's stock is very expensive
Costco has steadily grown its earnings at an above-average pace, which allowed the stock to rise.
COST EPS Basic (Quarterly YoY Growth) data by YCharts
One thing that will cause earnings to jump substantially is a membership price increase, which Costco has alluded to for some time. I wouldn't be surprised to see the membership increase and stock split announced in tandem, as it's best to get a few major pieces of news out of the way simultaneously.
But do the prospects of these potential major announcements on the horizon warrant buying Costco's stock now?
While Costco has been a top-notch executor, it trades at a massive premium to nearly all stocks on the market. Costco trades at 47 times forward earnings, nearly double what Walmart trades at (25). That's even more expensive than what artificial intelligence (AI) powerhouse Nvidia trades at (32 times earnings).
There's no doubt that Costco trades at an unbelievable premium. But its past execution speaks for itself. Even then, I still think Costco's stock is too pricey to buy. Costco needs to grow into its valuation, and it has gotten a bit ahead of itself, even with the prospect of a stock split and membership hike on the horizon.
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Keithen Drury has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
