This big-box retailer’s shares were recently upgraded to “Outperform” at Oppenheimer. The company beat estimates by a penny last quarter, and is often thought of as “recession-proof”.
Costco Wholesale Corporation (COST)
from Dividend Lab
We seek dividend stocks with consistent records of distribution increases, strong underlying fundamentals and clear plans for future growth. Costco (COST) meets and exceeds all these requirements. Compared to its primary competitors, Costco boasts a much lower payroll, higher per-store revenues and a loyal customer base that has fueled consistent EPS growth and an 11-year track record of increasing dividend distributions.
Investors looking for value may be dissuaded by COST’s PE ratio: trailing at 25.4, COST is on the expensive side. Earnings have kept up with the company’s valuation, however; annual EPS for 2014 stood at $4.65, up from $4.49 in 2013. Trailing EPS now stands at $5.12 and the company is projected to continue its annual EPS growth trend following the typical revenue boost it receives in Q4. Earnings typically spike in Q4 as a result of increased consumer spending during the holiday season. EPS fell slightly in Q3, from 1.25 to 1.17, but annualized EPS for 2015 is still projected to beat 2014.
Costco has a track record of special, “bonus” dividend payments. On November 30, 2012, the company paid out a $7 per share dividend in addition to its quarterly distribution of $.275 to shareholders. On February 27 this year, Costco paid out another special dividend bonus of $5 in addition to its quarterly distribution of $.40 per share.
The company plans to double its US locations from 500 to 1000 over the next decade, an ambitious goal, but Costco still has room to grow in terms of geography and brand recognition, unlike its major competitor, Wal-Mart. Costco CFO Richard Galanti said the company will “most likely end the fiscal year with 24 net new openings and 687 Costcos worldwide.” About 70% of Costco’s more than 670 warehouses are located in the United States, and generate about 70% of revenues. New locations in Canada and Mexico are part of Costco’s long-term strategy to expand beyond the US retail market.
Costco’s expansion overseas lets the company take advantage of lower labor costs: operating margins on its non-US stores averaged 4.2% in the last nine months, compared to 2.6% for its domestic locations. The Fed’s planned interest rate increase should halt the continued appreciation of the dollar, strengthening Costco’s position in overseas markets such as Europe, Canada, Mexico, Korea and Japan.
Investors looking for a “recession-proof” dividend stock in the event of an economic downturn following the expected Fed interest rate increase later this year or sometime in early 2016 would do well to take a position in COST.
Costco’s membership structure offers revenue stability through consumer loyalty.
Membership fees contributed $584 million in income for Q3 2015, with a quarterly increase of 250,000 members to the company’s Executive membership class, which accounts for 36% of the retailer’s membership base and more than two-thirds of total sales. In the event of a market correction or an economic downturn, Costco’s earnings are well-protected.
Costco is an attractive option for dividend investors looking for consistent distribution payouts on a reliable upward trend from a company with solid revenues and an ambitious plan for international growth. The only areas of concern we can see are the company’s exposure to gas prices and the fluctuations of the foreign exchange markets.
Todd Johnson, Dividend Lab, www.dividendlab.com, 505-514-0036, August 17, 2015