As a Costco Wholesale Corporation (NASDAQ: COST) member, you may also want to consider investing in the popular warehouse club for dividends.
But what exactly are dividend stocks? Dividend stocks refer to a payment that a company gives to its shareholders, typically issued in cash payment form, through extra shares, and possibly through other forms of payment from that company. A company's board of directors makes the decision to offer dividend payments. The membership business model is successful because it offers bulk items at lower prices to ensure customer loyalty.
Does Costco fit your dividend requirements? Let's take a look at information about Costco Wholesale Corporation and the pros and cons of investing in this all-time popular dividend payer.
About Costco Wholesale Corporation
The first Costco opened in Seattle in 1983 and the Price Company and Costco merged in 1993 to become Price/Costco. The 1997 corporate name was changed to Costco Companies, Inc., and its corporate name was solidified in 1999.
According to our MarketBeat profile, Costco Wholesale Corporation operates membership warehouses beyond the United States (including Puerto Rico) and across the world, including the following countries:
- The United Kingdom
The company offers a wide range of products, including the following:
- Dry groceries, meat, produce, deli and bakery products
- Deli products
- Health and beauty aids
- Garden and patio products
- Sporting goods
- Tires and automotive care products
- Seasonal products
- Office supplies
The company successfully sells warehouse memberships for customers and entices customers with low prices on its products compared to traditional grocers and other retailers.
Learn more: What is a Dividend Aristocrat?
Pros and Cons of Investing in Costco
Let's take a look at the pros and cons of investing in Costco Wholesale Corporation before you make a final decision about whether you might want to invest in the company.
First, the benefits of investing in Costco:
- Moderate buy ratings: Most Wall Street analysts have issued a moderate buy rating for the stock, meaning that analysts believe the stock will likely outperform the overall market.
- Margin: It's worth noting that the company's adjusted gross margin declined 17 basis points year over year to 11.05% during the first few months of fiscal 2022. It also reduced other expenses due to other expenses to 9.04% of its revenue, lowered from 9.85% in the prior-year period and its operating margin expanded to 3.42% from 3.33% YOY.
- Sales growth: Costco's sales have demonstrated consistent growth for more than two years. Net sales for the quarter increased 16.1%, to $50.94 billion from $43.89 billion in the previous year and in the first 24 weeks increased 16.4%, to $100.35 billion, up from $86.23 billion last year.
- Ratings higher than competitors: Let's take a look at Costco Wholesale versus Walmart, one of Costco's top competitors. Costco has a net margin of 2.60% compared to Walmart's 2.36%. Costco's return on equity (at 29.71%) also beat Walmart's return on equity.
- Dividends: Costco Wholesale pays an annual dividend of $3.60 per share and has a dividend yield of 0.7%. In comparison, Walmart pays an annual dividend of $2.24 per share and has a dividend yield of 1.7%. Costco Wholesale pays out 28.3% of its earnings in the form of a dividend. Walmart pays out 44.7% of its earnings in the form of a dividend. Both companies have healthy payout ratios and can cover their dividend for the foreseeable future.
- Just about perfectly recession-proof: The warehouse retailer is practically recession-proof and continues to grow its revenue despite the pandemic and ensuing inflationary environment, most likely due to that clingy membership fee. In addition, the company uses its buy-in-bulk-to-save-money mantra to its advantage — it can both counter the threat of inflation and offset rising costs with membership revenue that it gathers.
Let's take a look at the cons next:
- High price-to-earnings (P/E) ratio: Costco's price-to-earnings ratio was 39.71 as of September 16, much higher than the entire S&P 500. The P/E ratio refers to the ratio of a company's share price to the company's earnings per share and indicates what the market will pay for a company's stock based on its past or future earnings. In any case, it's a high P/E ratio for an established company, and most companies in Costco's peer group trade lower than the company.
- Overvalued: Costco trades at a high valuation compared to its peers. In short, it's in danger of being seriously overvalued. An overvalued stock has a price not justified by its earnings outlook and trading at a rate that is unjustifiably and significantly in excess of other companies similarly to the company in question. The P/E ratio can indicate whether it is overvalued or not. The stock itself trades at a high rate compared to Walmart, which trades at 17 times forward earnings and Target, which trades 11 times forward earnings.
Learn more: What are Dividend Kings Stocks?
Is Costco Wholesale Corporation a Dividend Possibility?
Costco Wholesale Corporation handles disruption well. Despite rising prices due to inflation, serious supply chain issues and other maladies affecting the overall economy, Costco has, to some degree, managed to insulate itself from these problems due to its membership model, which compels people to come back again and again.
Can you now list several significant reasons why you may want to target Costco as your next dividend investment? Before you get started, look into the pros and cons of individual dividend stocks before you invest. Engage in deep research prior to hitting the "buy" button, especially if you're picking individual stocks. Even when you're looking at stocks with a positive history like Costco Wholesale Corporation, doing so can save you a lot of money in the long run.