Why Did Buffett Sell Costco?

Costco Wholesale Corporation (NASDAQ:COST) is a membership warehouse chain that enjoyed huge gains during the panic shopping sprees of 2020. In fact, Berkshire Hathaway vice chairman Charlie Munger serves as a member of the board of directors and personally owns over $60 million of Costco stock.

Susan Decker also serves on the board for both Berkshire Hathaway (BRK.B) and Costco. Berkshire’s stake in the company held at 4.3 million shares worth around $1.3 billion before the pandemic.

Then something strange happened in the third quarter of 2020. Berkshire head Warren Buffett sold the firm’s entire stake in Costco. It’s the end of a 20-year investment that started at $32 million in 1999. So, what caused this change of heart, and what does it mean for investors?

In 2000, Buffett explained how much he loves Costco and expressed his wishes that Berkshire had invested in the company sooner. It was at the insistence of Munger that it happened in the first place. He praises its inclusive meritocracy, cost advantages, and ethical business practices creating loyalty.

So why did Buffett dump his Costco stock?

Why Did Buffett Sell Costco Stock?

Costco reached record highs in 2020. Panic shopping at the onset of the pandemic spiked revenues as consumers rushed to stock up on necessities, like toilet paper, soap, and hand sanitizer.

Warehouse stores were perfectly set up for the pandemic and catered to this market. The company’s market capitalization soared to $160 billion by year end.

After share prices dropped to a 52-week low of $271.28, they soon bounced back to a high just short of $400. But COST share price failed to reach that height and spent December on the downturn. 

Small businesses, along with church and school organizations, often lean on Costco’s wholesale bulk pricing for supplies. But with everything moving virtual, much of this bulk food wasn’t needed.

Buffett loves Costco and bought in not long after long-time business partner Munger became a director in 1997. But he loves cash more, and selling shares over $350 that were originally purchased for $50 was a statement that price had got ahead of value.

Does Buffett Own Costco Now?

Berkshire Hathaway and Buffett no longer own a position in Costco. But its board members still own personal stakes, which we will discuss more below.

What is surprising is that the company sold before the company paid $4.4 billion in a special dividend to shareholders. The company outperformed retailers like Walmart (WMT) and grocers like Kroger (KR), both of whom benefited for similar reasons.

Business is booming, but Buffett has other plans for the money. He may believe Costco’s stock will slump over the next two years compared to other investments he could make. Many of his moves in 2020 favored commodities-backed investments.

After its initial purchase in 1999, Buffett increased Berkshire Hathaway’s stake by 24 million shares after a brutal second quarter that dropped the stock by over a third. It has since sold 20 million shares at opportune times to gain liquidity.

Of course, Buffett surely still feels the same about Costco as a brand. He simply saw more growth potential in other equities. And clearly the profit was worth banking.

As much as Buffett loves Costco, his partner Munger loves it even more. This means Berkshire’s principles will still be deeply imbued in the Costco’s board.

How Much Costco Stock Does Charlie Munger Own?

Charlie Munger still owns over $60 million in Costco stock, according to regulatory filings. He also sits on the board of directors.

Munger is an outspoken advocate of the warehouse chain and remains one of its biggest fans. He told the media multiple times Costco is his favorite stock.

Because of his close ties to Buffett, Munger’s opinion is valuable. Investors flocked to the chain and kept it a popular part of people’s portfolios.

It’s not just lip service either – Costco is consistently recognized as one of the best places to work in the U.S. Employees get competitive pay and benefits that keep them working happily for long careers that are rare in a high-churn industry like retail.

Customers also love Costco. In fact, they pay an annual membership fee just to shop. Costco pioneered the subscription business model Amazon popularized with its Prime membership. This drove revenues and profits throughout the past 20 years.

And Costco is still a good investment, regardless of what Buffett’s decision.

Is Costco Stock A Good Investment?

The warehouse giant has a market cap of over $160 billion and an earnings multiple of 37x. It also pays a dividend of 0.78 percent in quarterly cash payments.

On top of that, it issued a $10-per-share dividend in December that raised its 2020 total to 3.5 percent. That’s great for investors seeking income. If lockdowns stretch beyond expectations, Costco should continue to boost its bottom line.

The company is an iconic retailer that grew while other brick-and-mortar businesses struggled. This should remain true next year, whether vaccines are successful.

Why Did Buffett Sell Costco? The Bottom Line

Warren Buffett and Berkshire Hathaway sang the praises of Costco for the past 20 years. There’s good reason – the firm made a solid profit over the years by investing in the warehouse retailer. They also share two board directors.

The pandemic pushed Costco to record highs, as it served panic shopping and changing consumer shopping habits. As lockdowns dragged on much longer than expected at first, the company’s share prices slid by year end.

Buffett sold Costco at its November height, just before it paid its special dividend. He has allocated the cash to business opportunities that he deems will have a higher return over the coming decade.

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