Walmart (NYSE: WMT) is known for its “every day low prices” strategy. It’s about to take a similar approach with its shares.
The giant retailer plans to conduct a 3-for-1 stock split on Feb. 26. Walmart CEO Doug McMillon said in a press release that the company is taking this action to make its shares more affordable to its associates. Of course, shares will also be more affordable to investors who don’t work for the company. Should you buy Walmart stock ahead of its stock split?
Don’t buy just because of the split
Let me say right off the bat that it’s probably not a great idea to buy Walmart shares just because of the upcoming stock split. Nothing will change about the company’s underlying prospects when it increases the number of outstanding shares.
Yes, stock splits can sometimes cause a stock to jump. The idea is that the lower price results in heavier buying by retail investors who might have avoided the stock when it was more expensive.
However, such gains are usually temporary. That’s been the case with Walmart in the past. The company has conducted nine stock splits in the past. The most recent occurred on April 20, 1999, when Walmart conducted a 2-for-1 stock split. Although shares rose moderately immediately after the split, all of the gains evaporated within a couple of weeks.
Good reasons to consider buying Walmart
Although buying Walmart solely because a stock split is on the way isn’t the best move, there are other good reasons to consider buying the stock. I’d put the company’s competitive position near the top of the list.
Walmart ranks as the biggest retailer in the world based on revenue. It has textbook moats of cost advantages and economies of scale. The company generates strong cash flow. Few businesses are as resilient as Walmart.
The discount retailer also continues to deliver solid growth. Walmart reported 7.3% year-over-year revenue growth for the fourth quarter of 2023. On a constant-currency basis, its revenue jumped 7.9%.
Walmart has multiple ways to continue growing. E-commerce especially stands out. The company is also expanding its global advertising business with revenue soaring 20% year over year in Q4.
Income investors have a lot to like with Walmart’s dividend. The retail giant’s dividend yield currently stands at 1.35%. Walmart joined the Dividend Kings club last year with its 50th consecutive year of dividend increases.
The main knock against Walmart
I think there’s one main knock against Walmart for investors to consider. Its shares are relatively expensive — and I’m not talking about the share price itself.
Walmart stock trades at nearly 24 times expected earnings. This forward earnings multiple is higher than the level from 30 years ago, when the company arguably had significantly greater growth prospects ahead of it.
Some investors could especially be concerned about Walmart’s valuation with the company’s near-term growth prospects. Walmart’s 2024 guidance projects that revenue will increase by only 2.5% to 3% on a constant-currency basis.
My view is that Walmart remains a good pick for long-term investors. However, I think that buying after a pullback could be the best approach with the stock.
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Should You Buy Walmart Stock Ahead of Its 3-for-1 Stock Split? was originally published by The Motley Fool