Last year was tumultuous in many ways. The U.S. inflation rate tipped the scales at its highest level in 40 years (9.1%), and the all three major U.S. stock indexes were, at one point, firmly entrenched in a bear market.
But amid this turmoil, investors found solace in companies enacting stock splits.
A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count without any impact to its market cap or operations. A forward stock split reduces a company’s share price to make it more nominally affordable for retail investors. Meanwhile, a reverse stock split is designed to increase the share price of a public company and is often used to avoid delisting from a major exchange, or perhaps get on the radar of institutional investors.
Tesla, Amazon, and Alphabet kicked off stock-split euphoria last year
Most investors tend to get excited about forward stock splits. Companies that conduct forward stock splits are often firing on all cylinders and have seen their share prices skyrocket over time.
Last year, a number of high-profile companies enacted forward stock splits, including electric-vehicle manufacturer Tesla (TSLA 1.05%), which split 3-for-1 in August; e-commerce behemoth Amazon (AMZN -0.07%), which split its shares 20-for-1 in early June; and internet search kingpin Alphabet (GOOGL 4.61%) (GOOG 4.42%), which completed its own 20-for-1 split in mid-July.
The competitive advantages Tesla, Amazon, and Alphabet bring to the table, coupled with their overwhelming outperformance of the S&P 500 over the past decade, made splitting their respective shares a logical move. For everyday investors without access to fractional-share purchases with their online broker, you’d have needed around $1,200, $3,700, and $3,000, respectively, to purchase a single share of Tesla, Amazon, and Alphabet prior to their splits. As of this past weekend, everyday investors could purchase one share of each company for less than $400, on a combined basis.
Which high-profile companies are next to split?
The $64,000 question is, “Which companies are set to become the stock-split stocks everyone talks about in 2023?” Three brand-name stocks come to mind.
Perhaps the most-logical stock-split candidate in 2023 is warehouse club Costco Wholesale (COST 0.18%). If you include the spin-off of Price Enterprises in 1994, Costco has split its shares four times in its publicly traded history. However, its last stock split occurred on Jan. 13, 2000. After more than 23 years without a split, a single share of Costco will set shareholders back about $515!
There are a couple of clear-cut reasons Costco has been such a top-notch investment for decades. To begin with, its warehouses are packed with nondiscretionary goods. These are items like groceries and toiletries that consumers are going to purchase in any economic environment. By devoting significant square footage to these necessary items, Costco all but ensures members will visit its stores on a regular basis.
To build on this point, Costco has been quite successful at getting its members to buy discretionary items once inside its stores. Although margins on grocery items tend to be razor-thin, it only takes a couple of discretionary purchases (clothes, electronics, jewelry, and so on) for Costco to benefit.
Another reason Costco Wholesale is such a superstar is its prowess for buying most of its products in bulk. Buying in bulk helps to reduce the per-unit cost of goods, which it can then pass along to its members in the form of lower prices. Being able to undercut traditional supermarkets and local grocery stores on price is a big reason why Costco keeps winning.
Lastly, the company’s membership-driven model has worked wonders. Having to pay $60 to $120 annually for the right to shop at Costco puts high-margin revenue right into the company’s pockets. It also contributes to Costco’s ability to undercut grocery stores on price.
Chipotle Mexican Grill
Based on share price, fast-casual dining chain Chipotle Mexican Grill (CMG 1.33%) is the no-brainer candidate to split its stock in 2023. Following its debut in 2006 at $22 per share, Chipotle has done nothing short of skyrocket. As of last weekend, a single share would set everyday investors back $1,693. In its nearly 17-year history, the company has never conducted a split.
One of the reasons Chipotle has been a top-tier investment for more than a decade is the differentiation it provides in food quality and sourcing. When applicable, the company strives to source many of its ingredients from local farmers. Likewise, it only uses responsibly raised meats, and prepares its food in-store daily (i.e., no freezers). With consumers gravitating to healthier food choices, Chipotle has been a clear winner.
In addition to product differentiation, Chipotle Mexican Grill’s success is also a reflection of its innovation — and I’m not just talking about what’s on the menu. During the pandemic, Chipotle began rolling out “Chipotlanes,” which are drive-thru lanes specifically for people picking up an order that was placed online or through their mobile app. By leaning on digital sales, which represented over 37% of food and beverage revenue in the third quarter, Chipotle has been able to sustain a double-digit growth rate in a challenging macro environment.
It’s also worth mentioning that Chipotle has had no issue tackling historically high inflation. The company has been able to raise menu prices across the board to counter higher input and labor expenses without reducing demand.
The third high-flying company that could become a talked-about stock-split stock in 2023 is semiconductor solutions specialist Broadcom (AVGO 2.19%).
Prior to Broadcom being acquired by Avago Technologies in 2016 (and retaining the Broadcom name), Broadcom had split its stock three times (1999, 2000, and 2006). However, no splits have been conducted since this combination seven years ago. As of this past week, a single share of Broadcom would cost everyday investors almost $598.
If there’s one catalyst that helps explain why Broadcom has been such a rock-solid performer for years, it’s the company’s wireless ties. Broadcom generates most of its revenue from producing wireless chips and components used in next-generation smartphones. Considering that it took telecom providers a good decade to meaningfully improve wireless download speeds from 4G to 5G, the ongoing device replacement cycle should be a boon to Broadcom’s top-and-bottom-line for years to come.
Then again, Broadcom isn’t solely tied to smartphones. Many of the company’s smaller operating segments offer substantial growth opportunities over the long run. This includes providing access and connectivity chips used in data center servers, as well as semiconductor solutions used by the auto industry in infotainment systems, driver assistance systems, and next-gen powertrains.
I’d be remiss if I didn’t also mention that Broadcom has time on its side. Even though semiconductor stocks are cyclical, the U.S. and global economy spend a lot longer expanding than they do contracting. That’s music to the ears of long-term investors. Further, with Broadcom often sporting a sizable backlog of orders, inevitable downturns usually don’t sting as much as they might for smaller chipmakers.