Stock splits always create extra hype for a stock, and for good reason. A stock that is ready for a split has usually done quite well for itself, multiplying by many percentages to reach its inflated price. That's exciting.
Costco Wholesale (NASDAQ: COST) stock has gained more than 220% over the past five years, seriously outperforming the market, and it's trading at nearly $900 per share, which could make it seem inaccessible to investors who don't have that much to invest right now. Is a stock split on the horizon?
Creating value for stakeholders
When companies announce stock splits, they invariably give similar reasons, which amount to making the stock more accessible to employees. Most large, public companies, including Costco, have employee stock-buying plans. Employees pay for the stock out of payroll deductions.
Costco went public in 1985 and has split its stock three times, in 1991, 1992, and 2000. The stock has gained 2,700% in the nearly 25 years since the last split, including dividends.
Management frequently talks about the value it offers for members and how it invests in its employees. When asked about when it would raise its fee prior to the recent hike, management typically pointed out that it would raise the fee when it would provide greater value for shoppers. When it feels that a stock split would provide value as well, it's likely to make it happen.
Another trick from its box
There's no question that investors love Costco stock. It's reliable for growth under almost any circumstances, with an excellent, differentiated business that attracts shoppers and volume. They love it so much that they keep buying it despite its valuation getting closer to nosebleed levels. It's up 35% year to date and trades at a price-to-earnings (P/E) ratio of 54, hovering near all-time highs.
Management has pulled a few tricks out of its hat over the past 12 months, beginning with a special dividend issued last December and culminating with a highly anticipated fee hike that finally went through in September. Costco's regular dividend isn't anything spectacular, yielding 0.6% at the current price, although it has been raised annually for the past 20 years. However, it has paid the special dividend, on average, every 2.5 years or so for more than a decade now, and this past year's was its largest ever at $15.
The fee hike was put off for longer than usual, which management attributed to its keeping its finger on the pulse of its shoppers. So long as they were already encumbered by inflation, it said it was going to delay the hike. But with inflation cooling, management announced the fee hike, bringing an annual, basic membership from $60 to $65, in July.
However, given the already very high valuation, Costco stock might be stagnating in the near term. It's roughly flat over the past month, and it might stay that way until there's some news or increased earnings to keep its valuation from spiraling upward.
Costco isn't known as a company with a lot of shtick. It has basic warehouses, no-nonsense policies, and cheap pricing. I don't think it would split its stock as a gimmick to hype up its stock and get people to buy it. However, management often says that it has "levers" to pull. If a stock split is a lever to pull to create value, and that value is easier access to stock options for employees, management might pull it.
As the stock keeps climbing, it's looking more likely that a split should be in the works. Management hasn't said this, but a four-figure stock price could make the stock appear out of reach for many workers and investors alike, even with the option for fractional shares. As it nears $1,000, a split might be coming soon.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
