The stock price approaches the $1,000 mark. Costco(COST.US) is opening a "stock split" window after 26 years?

Driven by strong performance, Costco Wholesale (COST.US) is once again approaching the $1,000 per share mark. Previously, this retail giant delivered another solid earnings report, with revenue and profit growing double digits year over year.

At the same time, its forward P/E ratio has soared to 48.57, indicating a high valuation level. This has led institutional analyst Dividend Collection Agency to believe that the company is very likely to split its stock in the near term. The analyst stated that without a stock split, the high P/E ratio—well above its five-year average—could pressure future investment returns.

Strong quarterly performance, but signs of slowing growth

After releasing its Q2 earnings, Costco’s stock rose nearly 2%, to $998.10 per share. However, over the past year, the stock has declined nearly 3%. Dividend Collection Agency attributes this mainly to valuation issues rather than fundamentals.

Last December, the stock price briefly fell to around $850 per share, offering a better entry point for long-term investors. Despite the latest quarterly report showing continued strength across all business segments, investors may be viewing Costco more as a safe haven.

This quarter, both earnings per share (EPS) and revenue grew double digits. EPS reached $4.58, beating analyst estimates by $0.04, up 13.93% from $4.02 a year earlier, driven by a 13.8% increase in net profit to $2.04 billion. Revenue and gross margin also improved, with revenue up 11.35% to $69.6 billion, and gross margin expanding slightly from 10.85% to 11.02%.

The main growth driver was higher average customer spend, up 3.5% year over year, outperforming last year’s 3.2%. However, adjusted same-store sales and customer traffic fell short of the previous fiscal year. Adjusted same-store sales increased 6.7%, below the prior 9.1%; same-store customer traffic grew 3.1%, less than the previous 5.7%. Digital-driven same-store sales accounted for 21.7%, down 50 basis points.

Overall, while Costco remains resilient, these slowing figures suggest the economy may be decelerating, with consumers still feeling the impact of interest rate changes.

Additionally, the continued growth in membership numbers supports Costco’s performance. Membership fee income increased by about 14%. Paid memberships rose from 78.4 million last year to 82.1 million, a 4.8% year-over-year increase, compared to a 6.8% growth in the previous fiscal year. Total cardholders reached 147.2 million, up 4.7%, still below last year’s 6.6% growth.

“Therefore, we can say that this quarter’s results remain solid, but the retailer’s growth pace appears to be slowing,” said Dividend Collection Agency. “More importantly, with ongoing US-Iran tensions, inflation could rise again, potentially further slowing Costco’s growth in the coming quarters. The recent rise in long-term Treasury yields and market volatility may be early signs.”

Why is Costco considered a safe haven?

Known for offering low-priced goods, Costco’s business model is well understood by consumers. Its top-selling categories include jewelry and gold, toys, home goods, and pharmacy. Given recent macroeconomic uncertainties, Dividend Collection Agency expects gold and jewelry to remain among the best-selling categories for some time.

However, investors favor the stock mainly because of its strong cash flow and fortress-like balance sheet with an AA credit rating.

Although Costco’s dividend yield is modest at about 0.5%, its ample cash flow supports ongoing dividend increases and occasional special dividends. For example, at the end of 2023, it paid a special dividend of $15 per share. This also enables frequent share repurchases, providing substantial returns to shareholders. Compared to last year, the company repurchased 20 million shares.

In this quarter, Costco’s operating cash flow increased from about $6 billion to $7.7 billion. Free cash flow rose from $3.6 billion to $4.87 billion, during which the company paid $1.154 billion in dividends. This keeps its dividend payout ratio at a healthy approximately 24%.

Dividend Collection Agency expects the company to soon announce another dividend increase, possibly in the double digits, with the per-share dividend rising to the $1.40–$1.45 range. As of the end of the quarter, Costco held $17.4 billion in cash and cash equivalents, with only $5.7 billion in long-term debt.

Stock split on the horizon?

Dividend Collection Agency believes Costco may split its stock primarily due to its high valuation. Even so, the agency does not expect the stock price to fall sharply.

Notably, Costco’s last stock split was 26 years ago, a 2-for-1 split. The agency thinks that, in today’s market environment, a split could bring more benefits than in the past.

The reason is that market conditions have changed significantly. The widespread use of the internet has made financial education more accessible, and more young investors are actively participating in the market. Currently, Costco’s forward P/E ratio exceeds 48, well above its five-year average, which could be an ideal opportunity to attract investors and improve stock accessibility. A stock split could lower barriers for retail investors and boost confidence in the company.

Given Costco’s substantial growth potential—its global warehouse count is projected to reach only 942 by 2026—the agency believes that a split now would lay a better foundation for future growth. Since the last split over two decades ago, Costco’s stock price has increased nearly 2,000%.

Comparatively, Costco’s forward valuation multiple is much higher than that of its closest competitor, Walmart (WMT.US), with a forward P/E of 42. Target (TGT.US) has a forward P/E of 15.0, and BJ’s Wholesale Club (BJ.US) is at 21.19.

From the FAST Graphs chart below, it’s clear that Costco’s current stock price appears overvalued. If its valuation reverts to a normal multiple and the market experiences a significant downturn or correction, investors could face downside risk.

While Costco should command some valuation premium, a forward P/E near 50 could lead to lower-than-expected future returns, as reflected in its performance over the past year.

Historically, Costco management has expressed a preference for returning value through special dividends rather than stock splits. Dividend Collection Agency notes that, given the company’s apparent disinterest in splitting, it’s only possible that a split might happen, but it’s not guaranteed.

However, times are changing. Costco might follow the example of other giants: Walmart split its stock 1-for-3 in early 2024; Nvidia (NVDA.US) conducted a 1-for-10 split when its stock hovered around $1,200 in 2024; and Netflix (NFLX.US) completed a split last November after its stock reached $1,100 per share.

Risks and summary

Besides underperforming the broader market, Costco must also watch for recession risks. As mentioned, escalating conflicts with Iran could push the economy into recession. Additionally, a slight rise in unemployment and recent signs of labor market weakness may signal tougher challenges ahead. If unemployment continues to climb, it could suppress sales growth and membership renewals.

Given its high valuation, a prolonged downturn could lead to a significant decline in Costco’s stock price, potentially delaying or preventing a stock split. While a split is not certain, Dividend Collection Agency believes it’s quite likely in the medium term.

Looking ahead, supported by easing tariffs and solid fundamentals, the agency expects Costco to maintain strong operational performance. Although growth may slow, its valuation premium is likely to persist.