Could a stock split make it a great buy?

Could a stock split make it a great buy?

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

In recent years, stock splits have become associated with high-flying technology stocks like those in the “Magnificent Seven.” Walmart’s announcement is a reminder that a stock split can happen at any company at any time, even if the stock price isn’t exceptionally high. Walmart shares closed Wednesday at $165.25, approaching an all-time high.

The split would be the retailer’s first since 1999, reflecting the fact that the stock has mostly struggled over the past 25 years. He fell behind Amazon And substandard performance Standard & Poor’s 500although the business has performed well in recent years.

Walmart argued that the stock split was designed to encourage employees to buy the stock. The company indicated that more than 400,000 employees participate in the associate stock purchase plan. This allows employees to purchase stock through payroll deductions and benefit from a 15% match on the first $1,800 they contribute each year.

CEO Doug McMillon said of the decision: “Sam Walton believes it is important to keep our share price in a range where purchasing whole shares, rather than fractions, is affordable for all of our partners. Given our growth and plans for the future, we felt this was the right time to split the shares.” And encourage our partners to participate in the coming years.”

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

The Walmart sign on the storefront lit up

Image source: Walmart.

What does a stock split mean for Walmart investors?

Stock splits get a lot of attention in the media, especially when they happen at a large company like Walmart, but they don’t affect the fundamentals of the business in any way. While it may appear that the share price has become cheaper, the overall size of the business remains the same, whether measured by profits, cash flow or revenue.

The stock split will not affect any of these valuation ratios. This will split the company’s stock pie into more pieces, but investors will own the same percentage of the business they did before.

However, there is some evidence that stock splits are associated with outperformance of the stock over the next year. This may be due to the momentum heading into the split as it usually comes after significant price gains or increased interest among investors. Walmart clearly hopes the move will encourage more buying among its employees, which could help push the stock higher.

Is Walmart stock a smart buy?

After being slow to embrace e-commerce in the early 2000s, Walmart has made big strides in recent years, adding grocery pickup stations in most of its stores and embracing the omnichannel retail model. It started building its own third-party e-commerce marketplace to compete with Amazon.

In most recent quarters, it has posted faster e-commerce growth than Amazon. Meanwhile, its grocery business, which makes up more than half of its revenue, has been able to withstand inflation and the pressures felt by consumer retailers.

In the third quarter, the company reported sales growth of 5%, excluding fuel, and adjusted operating income rose 3% to $3.5 billion. It also raised its revised EPS guidance for the year to $6.40-$6.48.

Operationally, Walmart looks as strong as it has in a long time, but there’s a difference between a well-run business and a stock that’s a good buy. At a forward price-to-earnings ratio of 26, Walmart’s valuation is similar to Walmart’s. Standard & Poor’s 500‘s. At that price, investors are paying a lot for Walmart’s modest growth prospects.

Walmart is a safe stock with a long track record of raising its dividend, but investors must understand that this is what they are paying for. For the right type of investor, Walmart is a smart buy. It is a well-managed, dividend-paying and recession-proof company. But if you’re looking for growth or a stock that can beat the S&P 500 by a significant margin, there are better stocks to own.

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

Walmart stock gravitates toward all-time highs: Could a stock split make it a great buy? Originally published by The Motley Fool

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