Is Costco’s Dividend Increase Worth Buying?

Retail giant Costco Wholesale Corporation (NASDAQ:COST) caught investors’ attention once again recently by announcing an increase in its quarterly dividend by 13.7% year over year to $1.16. This raises the annual dividend to $4.64 per share, representing a yield of 0.64%.

The company has a long history of rewarding shareholders through dividends, with a record of increasing dividends for 19 straight years. While this history gives a sense of dependability, the current yield doesn’t look exciting enough for income-oriented investors, who essentially look out for yields that exceed those of so-called risk-free returns.

A 3-month Treasury bill now pays around 5.4% annually so by that benchmark the yield isn’t exactly a screaming buy. But are there other aspects to Costco’s business model that make it worth buying, perhaps even further dividend hikes would justify a common stock purchase?

Investors Are in For a Treat

Membership-based wholesale retailer Costco has another potential catalyst to entice investors, called a special dividend.

The company paid a special dividend of $15 per share earlier this year, which represented a substantial boost to shareholders returns.

This isn’t a one-off occurrence, and in fact Costco has a history of surprising investors with these special payouts approximately every three years or so.

It’s as if Costco keeps its annual payout muted so the ongoing liability is not perpetual but rather it has some background accounting mechanism whereby it keeps track of what the dividend would be if paid at market rates and then intermittently rewards shareholders more appropriately. Of course this is speculative but it seems to tie in with the practice of issuing special dividends from time to time.

It’s no surprise the company can issue such large chunks from time to time given that it sits with a total of $10.32 billion in cash and short-term investments, significantly higher than its long-term debt of $5.87 billion.

In the quarter that ended on February 18, the company generated $5.38 billion from operating activities, an increase from the $5.8 billion in the corresponding period last year.

What Are Costco’s Financial Strengths?

Costco had more than just a dividend increase to celebrate recently. It reported some impressive sales figures too. For the retail month of March, spanning a five-week period that ended on April 7, it enjoyed a significant uptick in sales.

Net sales during this period rose by 9.4% year over year, reaching a total of $23.48 billion compared to $21.46 billion in the previous year. Also, same-store sales increased by 7.5% for the same period.

Costco’s net sales reached $146.64 billion for the first 31 weeks of the fiscal year, increasing 6.4% from $137.77 billion last year. The company’s continued strength and resilience in the retail landscape are bolstered by such net sales performance.

The footprint continues to grow at quite a pace too. As the third-largest global retailer, Costco’s network spans 876 warehouses across numerous countries.

The company is expanding its product lineup too. Recently it made headlines by offering prescriptions for weight loss drugs like Ozempic and Wegovy to members in all 50 states through its partnership with Sesame.

Since 2023, Costco has been selling gold bars at its wholesale locations, which resulted in a jump in sales. Wells Fargo approximates Costco’s gold sales to range between $100 million and $200 million each month. 

For the first half of fiscal 2024 ending on February 18, 2024, Costco’s total revenue rose by 5.9% year over year to reach $114.05 billion. For fiscal Q2, net sales grew by 5.7% to $57.33 billion. Earnings per share for the quarter showed improvement as well, rising to $3.92 from $3.30 a year ago. 

In addition, COST’s membership fee is on the rise thanks to new member sign-ups, more people upgrading to Executive Membership, and a higher rate of renewals. The company posted an 8.2% increase in membership fee revenue in the second quarter and the first half of 2024.

Shifting consumer behaviors and current economic conditions have not visibly affected the company yet.

Is Costco’s Dividend Increase Worth Buying?

Costco’s history of regularly issuing special dividends alongside its low payout ratio make its most recently dividend increase worth buying.

With regular dividend raises stretching nearly two decades, a 1.53% four-year average dividend yield, and a conservative 27.1% payout ratio, Costco’s dividend looks quite dependable. The company has increased payoffs by 13.4% over the past three years and 12.3% over the past five years.

When it comes to price performance, shares of this warehouse club operator have significantly outperformed the broader market in the recent past, gaining 33.7% over the past six months and 45.8% over the past year. Looking longer term, the stock has returned more than 200% over the past five years.

All those share price increases have done value investors no favors, however. Costco is trading at a premium valuation on a multiples basis at 45.33x forward price-to-earnings, which is a good bit higher than industry peers as well as its own 5-year average.

However, Wall Street analysts are still quite optimistic about the potential upside, expecting COST share price to reach $776.41 per share, changing 7.4% of its value from the current level. Also, the majority of analysts covering the stock, 17 out of 30, recommend buying it. 

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