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Does Costco’s Huge Dividend Raise Make It a Screaming Buy?

In Business
May 01, 2024

For the most part, companies that consistently raise their dividends tend to do so at modest, if not incremental, rates. By contrast Costco (NASDAQ: COST) has enjoyed blasting its payout well higher, as its recent annual raises have tended to hover around the mid-teen percentages.

Sure enough, in mid-April, the big retailer declared that its upcoming quarterly dividend would be nearly 14% higher than its prior rate. Dividend raises are an easy way to earn investor notice and, all things being equal, increase the stock’s attractiveness. Let’s take a look at this one to see if it helps make Costco stock an irresistible buy.

The big raises can’t keep pace with the price

Costco’s 2024 edition of its annual dividend raise lifts the payout to a quarterly rate of $1.16 per share. The first distribution at the new level will occur on May 10; shareholders of record as of April 25 will be paid on May 10.

Given those constant and substantial increases of late, you might think Costco pays a high-yield dividend… but you’d be wrong. The hikes haven’t really kept pace with the generally steady, upward trajectory of the stock’s price over the year, and the yield is actually quite low compared to other dividend payers.

Even with the latest raise, the retailer‘s yield only clocks in at 0.6%; the average of S&P 500 index component stocks is more than double that percentage, at 1.4%.

Looking at it a certain way, Costco’s skimpy dividend yield is a victim of the stock’s popularity — which says something about the company behind it.

The company is not your ordinary American retailer, and its management has been very effective at leveraging those differences. Famously, unlike a Kroger supermarket on your neighborhood Target store, Costco requires its customers to hold memberships in order to shop in its outlets. With this, it has a relatively small, yet steady revenue base that gives it some room to be competitive on prices.

In its latest set of monthly metrics (for March), Costco saw solid gains in comparable sales. The companywide increase was 7.7% on a year-over-year basis, with the U.S. figure of 7.3% eclipsed by the 8.6% of stores outside North America. That first rate well exceeded the 5.6% of the company’s fiscal second quarter, which ended in mid-February.

Said quarter was considered disappointing by many, and this, too, reveals something about the company. Revenue saw a nearly 6% rise (to $58.4 billion), which would be impressive for any large retailer but wasn’t good enough for many professionals following the stock — it fell short of the collective analyst estimate of slightly over $59 billion. (Having said that, Costco blew past expectations with a 19% leap in headline net income to $1.7 billion).

Analysts and investors alike expect robust performance every quarter from Costco because it’s shown many times it can deliver the goods.

It was not only a pandemic flash in the pan earlier this decade on customers stocking up on antiseptic wipes and bathroom tissue; it managed to boost revenue and profitability even as COVID-19 faded away. Its popularity during that tough period was sticky; annual revenue rose every year from 2020 to 2023, climbing from almost $167 billion to more than $242 billion across that stretch.

Pricey but well worth it

Costco is a reliably attractive option for a great many American shoppers, and more than a few outside our borders. Analysts are generally bullish on the company’s future, as they should be — collectively, they’re estimating a 14% rise in per-share net income this year over 2023 before that growth simmers down to 8% in 2025 (which is still a respectable gain). Revenue is projected to improve by nearly 5% this year and 7% the next.

A major wrinkle in all this is that Costco is rather pricey in terms of valuations. Its forward P/E approaches 46, with a trailing price/sales ratio of 1.3. Target, still a popular retail stock despite some recent hiccups, has a less burdensome forward P/E of just under 18, accompanied by a price/sales figure of 0.7. Its dividend also has a far higher yield, at 2.7%.

Yet if any sprawling retailer can keep that growth engine cranked sustainably high, it’s Costco. And although the dividend yield isn’t impressive, remember those double-digit annual raises are constant and habitual — so yes, the payout adds to the appeal of the stock. Costco is unique on the retail scene, and I think it’ll continue to be quite a success story. For me, it’s well worth its popularity, and that makes it a worthy addition to any portfolio.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Target. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.

Does Costco’s Huge Dividend Raise Make It a Screaming Buy? was originally published by The Motley Fool

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