Is It Time for Costco to Split?

Costco’s stock price has experienced enormous growth over the last few years. At the beginning of 2020, you could purchase a share for a little less than $300. Today, shares trade for closer to $1,000.

Not surprisingly, this growth has encouraged a lot of analysts to speculate about when Costco will split its shares. Is 2025 the year that Costco will finally split, making shares more affordable for investors? Let’s look at the company’s history and recent financials to make an educated guess.

Costco’s Last Stock Split

Costco’s most recent stock split took place in 2000. The 2:1 split doubled the number of available shares and lowered the purchase price from about $91 to about $49. As is fairly common, the stock suffered for a while after the split. The price fell below $40 and mostly remained there until 2004 (although there were a few short-term bumps when the value exceeded $40 during that time).

Growth quickened during the next decade, when the price soared from about $60 at the beginning of 2010 to over $375 by the end of 2020. The last four years have been even more impressive, which has left many investors wondering why the company hasn’t decided to split again.

Why Costco Hasn’t Split Its Shares

It’s important to note that Costco’s leadership hasn’t talked publicly about splitting the company’s shares. All of the chatter has come from outside sources, so we don’t really know why Costco hasn’t decided to split its shares since 2000. Still, we can make some reasonable guesses.

One possible reason is that the company is fostering a loyal shareholder base as advocated by long-term holder Charlie Munger, whose Berkshire Hathaway never engaged in splits.

The stock has been doing so well, so why dilute it to attract traders versus long-term holders? In some respects, it makes more sense to let shares keep gaining value instead of doing anything that might attract a less desirable shareholder base. In other words, there’s little merit in taking a different approach when the current strategy has worked so well.

A second reason is that investors simply don’t need stock splits as much as they used to. Fractional investing has become popular and easy to access. Investors who can’t afford to pay over $900 for a share can choose to buy a fraction that fits their budget.

Maybe they buy half a share for around $450 or a tenth of a share for about $90. Plenty of online brokers can make that happen, so there isn’t as much pressure for successful companies like Costco to risk stock splits.

Costco’s Financials Matter More Than Splitting Shares

Given the popularity of fractional investing, Costco can reach higher levels of success by concentrating on its financial performance instead of splitting its shares to make them more affordable.

Recent financial reports show that Costco has excelled in the ways that matter most to today’s investors. The most recent report shows that the company’s net sales increased 7.5% year over year, from $56.72 billion to $60.99 billion. Costco also improved its total company sales by 7.1% from the previous quarter.

These numbers show that Costco has thrived during a time when inflation has forced most consumers to buy fewer things. In some ways, higher inflation could have benefitted Costco.

Costco’s membership strategy means the company has a steady flow of revenue that represents a hefty chunk of its profits.

It also means the company can sell items at discounted prices. Plus, once consumers commit to memberships, which cost $60 to $100, they’re more likely to choose the store over its competitors. Since they became members, they want to take advantage of perks so they can get more from their paid memberships.

Now that inflation has started to temper, investors should pay attention to any changes in Costco’s revenue sources. At the moment, it looks like the company’s performance will remain strong. After all, lower inflation doesn’t solve financial concerns.

Costs remain high, but they aren’t increasing as quickly as they were a year ago. As long as consumers feel that pressure, they will seek out deals. There’s also a strong possibility that new members have developed a habit of looking for deals at Costco, so they will keep shopping there even if prices fall and they feel less pressure.

What Are Costco’s Options for Splitting Shares?

Although Costco’s executives might not feel that they need to split the company’s shares, conventional wisdom says that the current price is too high for many investors. That belief could push Costco’s leadership to at least explore the idea of splitting shares.

How Costco would decide to split its shares, however, could look very different from its 2000 split when it doubled its shares in a 2:1 split. For example, Costco could use a 3:1 split that would bring the current price close to the 2020 price. It could go even further by offering a 4:1 or 5:1 split. It’s been so long since Costco has split its shares that it could head in practically any direction without upsetting most investors.

Anything beyond a 5:1 split is probably unlikely, but it’s possible. After all, Wal-Mart shares trade for less than $100. If Costco increased its shares by 900%, it would have a more affordable price in the retail sector.

Is It Time for Costco to Split?

Costco is unlikely to split shares anytime soon because it management seems to have adopted a philosophy that it’s better to attract long-term investors versus shorter-term traders.

Costco is posting rock-solid numbers that show its strength in the retail sector, but that doesn’t mean now is the right time to buy. Yes, it’s possible that the stock will continue its upward climb. Realistically, though, it’s an expensive stock that won’t appeal to many value-oriented investors at the moment.

A split would make shares more affordable but it won’t change the valuation metrics, which suggest substantial downside risk to fair value of $706 per share according to a discounted cash flow forecast analysis.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.