Stock-split stocks statistically outperform the market in the next 12 months following a split. It is counterintuitive since it has nothing to do with the underlying business performance, but a stock split generates an average return of 25% to 30% in the following year, which usually beats the S&P 500 returns.
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A lot of stocks split in 2024, such as Nvidia. Which ones are set to make the move in 2025? I think Costco Wholesale (NASDAQ: COST) is overdue for a stock split next year. Here’s why Costco stock might be headed for a split in 2025 and whether the 100,000%+ returner since its initial public offering (IPO) is a buy for investors today.
Costco’s share price is closing in on $1,000, which has been a threshold when some companies have decided to split their shares. Doing so will make it more economical for individual investors to pick up a small stake in the business.
The year 2000 was the last time Costco split its stock, doing a two-for-one split. Before that, it split in 1993. With shares up close to 2,000% since the beginning of 2000, I think Costco is overdue for another stock split and believe the company will implement one in 2025 if the stock price breaks through the $1,000 level. It is close to 25 years since its last split, making the nominal share price one of the largest among large-cap stocks right now.
The stars are aligning for Costco to make a stock split in 2025. But how is the underlying business doing? Pretty darn good.
In the last five years, Costco’s revenue has grown cumulatively by 63%, reaching $259 billion over the last 12 months. With its wholesale membership model, customers have been increasingly loyal to Costco with its everyday low prices for bulk items. No matter if the economy is in a recession or economic expansion, customers appreciate the low prices at Costco. This is why revenue keeps compounding higher and higher every year.
Earnings have grown even quicker. Earnings per share (EPS) are up around 100% in the last five years, largely due to profit-margin expansion. Operating margin has gone from just above 3% to 3.67% in the last five years. This might feel like a small shift, but it is a big deal for a company like Costco with razor-thin profit margins.
With a rock-solid business model, I expect Costco’s revenue and EPS to steadily climb over the next five and 10 years. Customers love the Costco model, and I see no reason that changes anytime soon.
COST PE Ratio data by YCharts.
Costco is a good business and a strong stock performer of the last few decades, and it looks ready to split sometime in 2025. Regardless, this doesn’t immediately make the stock a buy for your portfolio.
If you ignore the short-term noise around stock splits, they do not matter for share-price returns over a five or 10-year period. What matters is the price you pay for the stock and its earnings growth while you hold it.
Today, Costco has a price-to-earnings (P/E) ratio of 56, which is very close to an all-time high set earlier this month. A P/E of this magnitude does not make sense for a slow-grower like Costco. It might make sense for a hypergrowth stock but not one that already generates over $250 billion in annual revenue.
For example, let’s assume Costco can grow its EPS by 100% over the next five years. If this happens, the P/E ratio will fall to 28, or right around the S&P 500 average, and that is under an optimistic growth scenario that was boosted by high inflation in the last five years. What this means is that many years of future earnings growth at Costco are priced into the stock.
No matter how good a business is, the earnings multiple you pay matters. Seeing that Costco is a low-growth company trading at a record-high earnings multiple that is approaching 60, I think this is a stock to avoid buying for the time being.
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*Stock Advisor returns as of December 23, 2024
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Nvidia. The Motley Fool has a disclosure policy.
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