It’s been an unforgettable year on Wall Street… for all the wrong reasons. The broad-based S&P 500 and tech-driven Nasdaq Composite have entered bear market territory; the U.S. economy has delivered back-to-back quarters of declining gross domestic product (i.e., a technical recession); and consumers are dealing with the highest inflation rate in more than 40 years. If this wasn’t enough, Russia invaded Ukraine in February, which puts even more pressure on already challenged global energy supply chains.
Yet in spite of this seemingly never-ending parade of bad news in 2022, the investing community found its shining light in the form of stock splits.
A “stock split” allows a publicly traded company to alter its share price and outstanding share count without impacting its market cap or operations. A forward stock split gives companies the ability to make their shares more affordable to everyday investors who might not otherwise have access to fractional-share purchases with their online broker. Meanwhile, reverse stock splits can lift a company’s share price to ensure it maintains the minimum listing standards on major U.S. exchanges.
The Tesla stock split is now complete
More than 200 companies have announced and enacted stock splits on a year-to-date basis. Perhaps none has drawn more interest than electric vehicle (EV) manufacturer Tesla (TSLA -2.69%).
In June, Tesla announced its intent to conduct a forward 3-for-1 stock split. With shareholder approval secured at the company’s Aug. 4 meeting, the Tesla stock split — its second in as many years — became official on Aug. 25, 2022. Whereas retail investors without fractional-share buying access would have needed to save around $900 to purchase a single share earlier this week, those same buyers can now scoop up a share of Tesla for around $300.
The euphoria surrounding stock splits (specifically forward stock splits) has to do with the realization that a company wouldn’t be splitting its shares if it wasn’t doing something right and getting recognized for it by Wall Street. In Tesla’s case, its skyrocketing share price over the past decade is a reflection of it being the first automaker in more than five decades to build itself from the ground up to mass production. Even with semiconductor chip and general parts shortages, this year should mark the first time the company achieves 1 million EVs produced.
Tesla has also decisively pushed into the profit column. After many years of relying on renewable energy credit sales to other automakers to lift its net income, the sale of EVs has been enough to carry Tesla firmly into recurring profitability.
Although Tesla remains rife with risks, shareholders can remain hopeful that a lower nominal share price can spur additional interest in the innovative EV maker.
This exceptionally popular stock could be next to split its shares after Tesla
With the Tesla stock split now complete, the $64,000 question becomes, “Which publicly traded company is next?” While there are dozens of stocks with lofty share prices that would likely benefit from making their shares more nominally affordable for everyday investors, there’s one exceptionally popular company that stands out as the most logical choice to split next. I’m talking about warehouse club, Costco Wholesale (COST -3.44%).
When the closing bell tolled on Aug. 23, a single share of Costco would set an investor back about $542. That’s up sharply from the roughly $40 per share investors were paying for a single share of Costco back in 2009. Over the past 36 years, Costco has only conducted two stock splits (in 1993 and 2000).
One of the most logical reasons for Costco to seriously consider a stock split is the percentage of retail investors who have a stake in the company. Even though 69% of its outstanding shares are being held by institutional investors, according to data from the latest 13F filings, Costco is the 87th most-held stock on online investing platform Robinhood. Robinhood is known for attracting retail investors, and Costco is the only stock with a nosebleed share price to find itself among the 100 most-held companies on the platform.
To add to this point, Costco’s daily average trading volume has tapered off as its share price has ascended to the heavens. Whereas Costco’s daily average trading volume predominantly ranged from 4 million to 8 million shares throughout much of the 2000s, its average daily trading volume has been closer to 1.5 million to 2.5 million over the past decade. A nominal haircut to its share price could reignite interest in the company among everyday investors.
And most importantly, Costco Wholesale continues to fire on all cylinders from an operating standpoint, which suggests its already lofty share price could head even higher over the long run.
This is a company that regularly uses its size to its advantage. By purchasing goods in bulk, Costco is almost always able to lower the per-unit price it pays. This allows the company to pass along savings to its members and, ultimately, undercut traditional grocery chains and mom-and-pop shops on price. In an environment where inflation is soaring, consumers are more likely than ever to seek out Costco for perceived bargains.
What’s more, the company’s membership model has proved to be a moneymaker. The more than 116 million people and businesses paying an annual fee to Costco, as of May 2022, provides the company with high-margin revenue that it uses to keep its grocery/nondiscretionary goods prices below its competition. Costco wisely understands that the biggest battle is drawing shoppers into its stores. Once there, it’s not too difficult to get them to spend money on higher-margin discretionary items.
If there’s one widely owned stock that perfectly fits the bill of the next stock-split stock after Tesla, it’s Costco Wholesale.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Tesla. The Motley Fool has a disclosure policy.
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