Stock Split Watch: Is Costco Next?

A high share price could be an indication of a potential stock split.

A high share price could be an indication of a potential stock split.

Costco Wholesale (COST 2.28%) should be on investors’ watch lists for a potential stock split. The company’s share price has risen to $493 as of this writing, which may put it out of reach for some individuals. A stock split would lower the price per share, making it more accessible to folks with less money to invest.

Notably, a stock split would not alter Costco’s capability to generate revenue and profits. Let’s look closer at the details of a potential stock split and some of the reasons why Costco’s shares have risen so high. 

Two people looking at towels in a store.

Image source: Getty Images.

Costco’s potential stock split 

In addition to not altering a company’s earnings potential, a stock split also does not change ownership percentages. A stock split merely splits the company into more pieces. For instance, if you owned 100 shares of Costco before a 10-for-1 stock split, you would own 1,000 shares after the split. That said, you would not own a larger piece of the company. If there were 20 million overall shares outstanding before the stock split, there would be 200 million afterward.

What a stock split does is slice up the business into smaller, more digestible pieces. Theoretically, that means the stock price should also fall to one-tenth the price from before a 10-for-1 split. However, that’s not always the case because an announcement of a stock split generates enthusiasm from investors, who start buying the stock and raising the price. 

Why has Costco been so successful? 

Chart showing Costco's annual revenue rising since 2014.

COST Revenue (Annual) data by YCharts

Costco is a membership retailer that has earned the reputation of providing excellent value to customers. It uses its size and scale to negotiate lower prices from suppliers and then passes those benefits on to members. The great customer value proposition has undoubtedly helped Costco grow sales from $112.6 billion in 2014 to $195.9 billion in 2021. In that same time, operating income has risen from $3.2 billion to $6.7 billion. 

Costco’s share price has followed the success of its business and has risen to $493. Because of Costco’s impressive and consistent performance, investors have flocked to the stock. Costco is also an attractive investment because of its potential to grow. It has 828 locations open worldwide, and yet in the potentially lucrative Chinese market it only has two of them.

Chart showing Costco's annual operating income rising since 2014.

COST Operating Income (Annual) data by YCharts

Should investors buy Costco stock ahead of a potential split? 

The short answer is no. For one thing, the company has made no such announcement — and there’s no telling if it will. In addition, Costco is trading at a price-to-earnings ratio of 39 and a price-to-free-cash-flow multiple of 36; each is at the higher end of its historical average in these valuation metrics. While a stock split could boost the share price from investor enthusiasm, the rise might be muted because the stock is already expensive.

For now, investors are likely to get more value from a Costco membership than from owning Costco stock.

Read this article on Motley Fool

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