The warehouse retailer’s shares are up by more than 30% so far this year.
Costco Wholesale (COST 0.48%) has been a long-term winner for investors. The company has delivered spectacular earnings growth, with revenue and net income climbing even during difficult periods such as the early days of the pandemic. And its share performance has followed. The stock has advanced by nearly 200% over the past five years, and is up by more than 30% so far in 2024.
As a result, the share price has reached more than $800 and trades for about 49 times forward earnings estimates — a pretty high valuation for a retail stock. That may make you hesitant about buying Costco shares today, but at the same time, the company’s performance still might draw you in. Before you make an investment decision, here are three things you should know.
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1. Costco’s pricey valuation may be justified
Costco may look expensive at first glance. After all, it trades at a significantly higher forward price-to-earnings (P/E) ratio than rivals such as Walmart or Target.
COST PE Ratio (Forward) data by YCharts.
But it’s important to remember that Costco’s warehouse model sets it apart. The company actually generates most of its profits through membership fees, so it’s bringing in that income before customers buy anything. This, along with Costco’s model of purchasing and selling products in bulk allows it to offer rock-bottom prices on merchandise. Since members pay for the right to shop at Costco, they tend to shop there as often as they can to get their money‘s worth — and the fact that its prices are low makes them happy to do so.
And since Costco sells essentials like food and gas, even during tough times, customers keep patronizing it. In fact, those are the times when they may appreciate its low prices the most.
Beyond that, here’s one more major point that makes Costco worth its premium valuation. Its membership renewal rates have remained above 90% for years, so investors probably can count on it maintaining its primary source of profits.
2. A stock split could be on the horizon
Costco’s share price does look pretty high for a retailer, and that may make it difficult for some smaller investors to access it, unless their brokers offer fractional shares.
This could prompt Costco to engage in a stock split. This entails issuing additional shares to current stockholders while simultaneously lowering the price of each share proportionally. Big names including Walmart and Chipotle Mexican Grill completed stock splits this year after their share prices soared.
A stock split isn’t a catalyst for share performance, as it doesn’t change anything fundamental about a company, nor does it alter its market cap. However, it is viewed as a positive step because it opens the door to more potential investors buying in, and by increasing demand for the shares, it could lift their price.
Costco hasn’t split its stock in about 24 years, but over the past two years, the stock has climbed from about $500 to more than $800. So now could be the time for Costco to make the move.
3. Costco is a compelling dividend stock
Costco doesn’t offer a particularly big regular dividend — its yield at the current share price is about 0.5% compared to the S&P 500 index’s average of 1.3% — but the stock still makes a compelling dividend buy for long-term investors. Of course, you’ll enjoy collecting an annual dividend that is currently $4.64 per share. And in the years since it began making those payments, they have only gone up.
On top of this, Costco is known for intermittently distributing hefty special dividends. It has done so five times over the years, and those payouts ranged in size from $5 per share for the smallest to $15 per share for the most recent one. The total amount of the latest payment, which it announced in December and paid out in early January, was $6.7 billion.
There’s no way of knowing for sure whether Costco will continue paying special dividends from time to time, but history shows that the company is amenable to it. So, it’s reasonable to be optimistic about the possibility of surprise special dividends, and in the meantime, investors will be able to collect growing regular dividend payments.
Adria Cimino has positions in Target. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Costco Wholesale, Target, and Walmart. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
