Walmart (WMT -0.56%) surprised investors earlier this year when the retail giant announced a 3-for-1 stock split, its first split in more than 20 years.
The news was unexpected. It's been a long time since Walmart's last split in 1999, and its share price wasn't exceedingly high. Investors responded well to the news, as Walmart explained that it decided to split its shares to make it easier for employees to buy the stock.
It's important to understand that stock splits don't create any fundamental value for investors. They simply divide the corporate pie into more pieces. There is some evidence that stock splits can lead to gains over the next year, but that's likely because they reflect momentum that already exists in the business, as splits usually come when a stock is at an all-time high.
Walmart stock continued to gain after the split announcement and has risen modestly since the split was executed on Feb. 26. After Walmart's split, will we see a similar move from Walmart's retail peers? Let's take a look at the top stock split candidates in retail to see if any will follow in Walmart's footsteps.
Image source: Getty Images.
1. Costco
Costco Wholesale (COST -0.86%) looks like the most obvious candidate for a stock split in the retail industry. Its share price was recently approaching $800, and the company has a long track record of delivering steady gains to investors.
Like Walmart, Costco has not split its stock for roughly a generation. The last split came in 2000 when the stock was trading at around $100 a share and Costco implemented a 2-for-1 split.
Costco management has not commented on a stock split, and the company doesn't typically pay much attention to its share price. Still, it's possible that the company could follow Walmart and lower its share price to make it more affordable to employees and individual investors. However, the stock might need to post more gains before management considers a stock split.
2. Home Depot
Home Depot (HD -0.54%) has challenged Walmart as the No. 1 retailer by market capitalization in the past, and the home improvement retailer has a long history of stock splits. Like Walmart, it also hasn't split its stock since 1999 when it issued a 3-for-2 stock split when the stock was trading at $102 a share.
Home Depot currently trades at a $376 share price, but the stock is still down about 10% from its pandemic-era peak. The home improvement industry has run into challenges as mortgage rates have soared and the housing market has slowed substantially since the pandemic.
A stock split might also be worth pursuing for Home Depot because it's a Dow Jones Industrial Average member, and the index is price-weighted -- so a split would prevent it from having outsize influence on the blue-chip index.
3. Target
The last remaining stock-split candidate in this retail group is Target (TGT -0.06%), the big-box multi-channel retailer that has differentiated itself with a focus on "cheap chic" branding and discretionary goods like apparel and home goods.
In recent quarters, Target has struggled due to weak consumer demand for discretionary goods and the company's own challenges with problems like theft. The stock is still down roughly a third from its peak during the pandemic.
Target is now trading at around $170 a share, but the company hasn't split its stock since 2000 like the other retailers in the group. With the retailer's stock still down substantially from its peak, a split for Target seems unlikely, but the potential is there if the share price continues to recover.
Image source: Getty Images.
Focus on fundamentals
Stock splits are exciting milestones, but ultimately they do little to create long-term value for investors. While it's fun to speculate about the potential for a stock split, investors are better off buying stocks with strong fundamentals than trying to guess which stock will be next to split.
As for Walmart, the company looks as strong as ever coming off its recent earnings report, with solid growth across the board, improving margins, and new opportunities in e-commerce and advertising, including the Vizio acquisition. Looking ahead, the stock looks set to reward investors whether they bought shares because of the split or not.
Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, Target, and Walmart. The Motley Fool has a disclosure policy.
