Investor enthusiasm for stock splits is a recent and surprising phenomenon. It’s surprising because stocks represent ownership positions in real companies. Dividing ownership into more pieces – which is all a stock split does – will not improve a company in any material way. Therefore, it is not one of the most important things that investors should focus on.
With this disclaimer, I can’t deny that investors are indeed excited about stock splits, and many companies are making stock split announcements accordingly. In this article I highlight three stocks from the S&P500 that could very well split within a year or so.
1. Costco Wholesale
Costco Wholesale (NASDAQ: COST), a warehouse-style retail chain with nearly 900 locations, makes most of its money from selling memberships. The company’s members enjoy low prices and reward the company with loyalty.
Costco last split its stock in January 2000. At the time of that 2-for-1 split, the stock was trading at about $80 per share, bringing the split-adjusted price down to $40. For perspective, it’s trading at more than 10 times this split price today at $860 per share at the time of writing.
As already mentioned, stock splits do not materially improve the company in any way. And this could be why Costco’s management hasn’t split its stock in more than two decades: It’s been too focused on making this one of the best retail operations in the world.
But maybe Costco is willing to make a change and split its stock. Former Chief Financial Officer Richard Galanti spent 40 years at the company and is considered one of the key architects of the company’s success. But he simply resigned, and his successor, Gary Millerchip, intervened. The change in management could lead to action on a stock split.
2. Deckers outdoors
Sometimes stocks are split after huge gains over relatively short periods of time. And this could motivate the shoe company Deckers outdoors (NYSE: DEK) split its shares. During the stock market crash at the start of the pandemic, Deckers’ stock was briefly below $100 per share. Now it trades at over $1,000 per share.
A rise of more than 900% in four years could motivate management to split the stock. But this stock performance didn’t just happen: business is good for this shoe company.
Deckers has two major brands in its portfolio: Ugg and Hoka. These two combined to generate $4 billion in net sales in the company’s completed fiscal 2024 (fiscal year ended in March). In perspective, these two brands had combined net sales of less than $2 billion in fiscal 2020. These two brands have more than doubled in size in just four years and are undeniably keeping consumers engaged.
A higher mindshare means that direct sales to consumers have increased enormously for Deckers. And since this is a higher-margin revenue stream, profits have also soared.
The higher earnings were likely a key reason the stock was included in the S&P 500 earlier this year. But the higher profits also help explain why the stock is now worth more than $1,000 per share, which could lead to a management split.
3. Booking positions
Online travel organization Bookings of holding companies (NASDAQ: BKNG) split its shares back in 2003, but it was a 1-for-6 backwards stock split. Back then it was called Priceline.
At the time, the company was struggling and its stock price was languishing. Management therefore had to increase the stock price by executing the reverse split, otherwise the company would have been delisted.
On a recent podcast for BarronsCEO Glenn Fogel was asked about splitting the stock and said, “I’m not saying we would never do it. Maybe.” But for Fogel, this is far from his thoughts as, again, he is more concerned with the fundamental drivers of the company.
Specifically, it seems like Fogel’s main focus is providing travelers with the best possible travel booking platform, constantly making changes to make things simpler. And it seems like the company is quite pleased with its efforts.
It started its financial report for the first quarter of 2024 by noting that bookings rose 10% year over year to almost $44 billion – the highest bookings ever.
Booking bookings probably wouldn’t be at all-time highs unless it really built an attractive platform for travelers. So it looks like Fogel’s focus on the company is worth it.
For me, Booking is a good example to end this article. Investors may focus on stock splits, but good management teams focus on running their businesses well. In this case, Booking achieved unprecedented platform adoption, which has increased profits. And these higher profits are why the stock has soared to an all-time high of nearly $4,000 per share.
Stock splits might be more fun. But for investors looking to make money in the long term, it’s important to find companies like Booking that grow thanks to a ruthlessly effective focus on getting better.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Booking Holdings and Costco Wholesale. The Motley Fool has a disclosure policy.
Stock-Split Watch: 3 S&P 500 Stocks That Look Ready to Split was originally published by The Motley Fool
