Stock price approaching the $1000 milestone. Will Costco (COST.US) open the "stock split" window for the first time in 26 years?

Under the strong performance, Costco (COST.US) once again approached the $1000 per share mark. Previously, this retail giant delivered a strong report again, achieving double-digit growth in revenue and profit year-on-year. However, at the same time, the stock's forward price-to-earnings ratio has reached 48.57 times, indicating a high valuation level. This has led institutional analysts at Dividend Collection Agency to believe that the company is likely to conduct a stock split in the short term. The analyst stated that if a stock split is not carried out, with the price-to-earnings ratio far above the five-year average, the company's future return on investment may be under pressure. While the quarterly performance was strong, the growth shows signs of fatigue After Costco released its second-quarter financial report, the stock price rose by nearly 2% to $998.1 per share. However, over the past year, the stock has accumulated a decrease of nearly 3%. Dividend Collection Agency believes that this is not related to its fundamentals, but more of a valuation issue. In December of last year, the stock price fell to around $850 per share, providing a brief but better entry point for long-term investors. Although the latest quarterly report shows that Costco's various businesses are still performing well, investors may view it more as a safe haven. This quarter, Costco's earnings per share and revenue both achieved double-digit growth. Earnings per share reached $4.58, surpassing analysts' expectations by $0.04, an increase of 13.93% compared to the same period last year's $4.02, benefiting from a 13.8% year-on-year growth in net profit, reaching $20.4 billion. Meanwhile, revenue and gross margin also improved, with revenue increasing by 11.35% to $69.6 billion, and gross margin expanding from 10.85% to 11.02%. The main driver behind the growth comes from a higher average selling price, which increased by 3.5% year-on-year, outperforming last year's 3.2%. However, adjusted comparable store sales and traffic were both below the same period last fiscal year. Adjusted comparable store sales increased by 6.7%, lower than the previous 9.1%; comparable store traffic increased by 3.1%, also lower than the previous 5.7%. The digitally-driven adjusted comparable store sales decreased by 50 basis points to 21.7%. Overall, while Costco's overall performance remains robust, these slowing down data also suggest that the economy may be decelerating, with consumers still feeling the continued impact of interest rate changes. In addition, the continuous growth in membership numbers has supported Costco's performance. Membership fee revenue increased by approximately 14%. The number of paid members increased from 78.4 million in the same period last year to 82.1 million, a year-on-year increase of 4.8%, lower than the 6.8% growth rate in the same period last fiscal year. The total cardholders reached 147.2 million, a year-on-year increase of 4.7%, also lower than the 6.6% growth rate in the same period last year. "Therefore, we can say that this quarter's performance is still solid, but it seems that the growth pace of this retailer is slowing down," Dividend Collection Agency stated, "More importantly, with the ongoing US-Iran conflict, inflation may rise again, and Costco's growth in the next few quarters may further decelerate. The recent rise in long-term government bond yields and market volatility may be early signs." Why is Costco seen as a safe haven? Costco is known for offering low-priced goods, and consumers are likely very familiar with its business model. Its top selling categories include: jewelry, toys, home goods, and the pharmacy. Given the recent increase in macroeconomic uncertainty, Dividend Collection Agency expects jewelry and toys to continue to be among the top-selling categories in the near future. However, the reason investors favor the stock is more likely due to its strong cash flow position and fortress-like balance sheet with an AA credit rating. Although Costco's dividend yield is not high, at around 0.5%, its abundant cash flow can support the company in continuously raising regular dividends and occasionally distributing generous special dividends, such as the $15 per share special dividend distributed at the end of 2023. This also allows the company to frequently engage in stock buybacks, bringing substantial returns to shareholders. Compared to the same period last year, the company repurchased 20 million shares of stock. This quarter, Costco's operating cash flow increased from about $6 billion to $7.7 billion. Correspondingly, free cash flow increased from $3.6 billion to $4.87 billion, during which the company paid out $1.154 billion in dividends. This keeps Costco's dividend payout ratio at a healthy level of around 24%. Dividend Collection Agency expects the company to soon announce another dividend increase, possibly in the double digits, with the per share dividend possibly rising to the range of $1.40-$1.45. As of the end of the quarter, the company had $17.4 billion in cash and cash equivalents, while its long-term debt was only $5.7 billion. Stock split on the horizon? Dividend Collection Agency believes that Costco may undergo a stock split, primarily due to high valuation. However, even with the current high valuation, the institution does not believe that the stock price will experience a significant decline. It is worth noting that the last time Costco underwent a stock split was 26 years ago, when it was a 2-for-1 split. Dividend Collection Agency believes that a split in the current market environment would bring far more benefits to the company than it did at that time. This is because the market environment has undergone profound changes. The widespread availability of the internet has made financial education more accessible, and more and more young investors are actively involved in the investment field. Costco's forward price-to-earnings ratio of over 48 times is significantly higher than its five-year average, which may serve as an excellent opportunity to motivate investors and increase stock accessibility. A stock split can not only reduce the entry barrier for retail investors but also boost market confidence in the company. Considering the company's huge growth potential, with global warehouse numbers expected to increase to only 942 by the end of 2026, Dividend Collection Agency believes that a stock split at this time would lay a more favorable foundation for Costco's future development. Since the last split over 20 years ago, Costco's stock price has accumulated an increase of nearly 2000%. In a horizontal comparison, Costco's forward valuation multiple is much higher than its closest competitor Walmart Inc. (WMT.US) with a forward price-to-earnings ratio of 42 times. Target Corporation (TGT.US) has a forward price-to-earnings ratio of 15.0 times, while BJ's Wholesale Club Holdings, Inc. (BJ.US) has a ratio of 21.19 times. From the FAST Graphs chart below, it is clear that Costco's current stock price appears to be overvalued. If its valuation returns to normal multiples and the market experiences a significant downturn or correction, investors may face potential downside risks. Although Costco should enjoy a certain valuation premium, a forward price-to-earnings ratio of close to 50 times could indeed lead to lower-than-expected returns in the future, as evidenced by the stock's performance over the past year. Looking back, Costco's management has expressed a preference for rewarding shareholders through special dividends rather than stock splits. Dividend Collection Agency states that given the company's apparent lack of enthusiasm for stock splits, it could be said that a split is possible but not guaranteed. However, times are changing, and Costco may follow the lead of other giants. For example, Walmart Inc. conducted a 3-for-1 stock split in early 2024 when its stock price hovered around $1200. NVIDIA Corporation (NVDA.US) also split its stock 10-for-1 in 2024 when its price was around $1200 per share, and Netflix (NFLX.US) completed a split last November when its price reached $1100 per share. Risks and Conclusion Apart from the possibility of lagging behind the market performance, Costco also needs to be vigilant about the risk of an economic downturn. As mentioned earlier, escalating conflict with Iran may push the economy into a downturn. In addition, with a slight increase in the unemployment rate, signs of weakness in the labor market in the near term may indicate more severe challenges ahead. If the unemployment rate continues to rise, it may restrain sales of CKH HOLDINGS membership renewals. Given its high valuation, if Costco falls into a prolonged recession, its stock price may face a significant decline. This could also derail its stock split plan. While a split is not guaranteed, Dividend Collection Agency believes it is quite likely in the medium term. Looking ahead, benefiting from the positive impact of tariff relief and its solid fundamentals, the institution expects Costco to continue to maintain a strong operating performance. While the growth rate may slow down, its valuation premium is expected to be sustained.