Is there a possibility that a stock split will result in an expensive purchase?

walmart‘s (NYSE:WMT) Inventory is divided. The world’s largest retailer surprised investors Tuesday by announcing a 3-for-1 stock split.

In recent years, stock splits have become associated with tech stocks like those featured in “The Magnificent Seven.” Walmart’s announcement is a reminder that stock splits can occur at any time in any company, even if the stock price is not particularly high. Walmart stock closed Wednesday at $165.25, near its all-time high.

This is the company’s first stock split since 1999, reflecting the fact that its stock price has largely stagnated over the past 25 years.I fell behind Amazon and underperformed S&P500even though business has been good in recent years.

Walmart argued that the stock split was intended to encourage employees to buy stock. The company said more than 400,000 employees are participating in the affiliate stock purchase plan. This allows the employee to purchase stock through payroll deduction and receive benefits equal to his 15% of her first $1,800 contribution each year.

CEO Doug McMillon said of the decision, “Sam Walton believed it was important to keep our stock price at a level where all employees could purchase whole shares, not fractions.” Given our future plans, we felt it was a good time to split our stock and encourage our employees to participate over the next few years.”

Walmart stock will begin trading on a post-split basis on February 26, and the split will increase the number of outstanding shares from 2.7 million to 8.1 million.

What the stock split means for Walmart investors

Stock splits, especially when they happen at large companies like Walmart, get a lot of attention in the media, but they don’t affect the fundamentals of the business at all. The stock price may seem cheaper, but the overall size of the business remains the same, whether measured by revenue, cash flow, or earnings.

story continues

Stock splits do not affect these valuation ratios. This simply divides the proverbial pie of corporate stocks into larger pieces, but investors end up owning the same proportion of the business as before.

Nevertheless, there is some evidence that stock splits are correlated with stock outperformance in the following year. This can typically be due to momentum toward a split after a significant price increase or increased investor interest. Walmart clearly hopes the move will encourage employees to buy more, which could lead to a higher stock price.

Is Walmart stock a smart buy?

Walmart was late to adopt e-commerce in the early 2000s, but has made significant progress in recent years, adding grocery pickup stations to most stores and adopting an omnichannel retail model. The company has begun building its own third-party e-commerce marketplace to compete with Amazon.

In most of the recent quarters, the company posted faster e-commerce growth than Amazon. At the same time, its grocery business, which accounts for more than half of its revenue, has been able to withstand inflation and the pressures felt by consumer discretionary retailers.

In the third quarter, the company reported comparable sales excluding fuel increased 5% and adjusted operating income increased 3% to $3.5 billion. The company also raised its adjusted earnings per share forecast for this year to $6.40 to $6.48.

Walmart’s business looks as strong as ever, but there’s a difference between a well-run company and a stock that’s a good buy.At a forward price/earnings ratio of 26 times, Walmart’s valuation is S&P500‘s. At this price, investors are paying a lot of money for Walmart’s modest growth prospects.

Walmart is a safe stock with a long track record of increasing dividends, but investors should understand that they’re paying a price. For the right kind of investor, Walmart is a smart buy. The company is a well-managed company that continues to pay dividends despite the recession. But if you’re looking for growth or a stock that has the potential to significantly outperform the S&P 500, there are better stocks to own.

Should I invest $1,000 in Walmart right now?

Before buying Walmart stock, consider the following:

of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks Investors can buy now…and Walmart wasn’t among them. These 10 stocks have the potential to generate impressive returns over the next few years.

stock advisor provides investors with an easy-to-understand blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stocks each month.of stock advisor Since 2002, the service has more than tripled S&P 500 returns*.

See 10 stocks

*Stock Advisor will return as of January 29, 2024

John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Jeremy Bowman has a position at Amazon. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.

Walmart stock is pulling towards all-time highs: Could a stock split be a big buy?Originally published by The Motley Fool