Image Source: Pixabay

Dividend stocks are shares in companies that reward investors with regular payouts, which can be used to supplement their income, cover living expenses, or reinvest in their stock portfolio.

Some factors set certain dividend stocks apart from others, such as dividend history, growth, yield, and payout ratio. Additionally, companies that continue to grow earnings and boast competitive advantages can continuously pay higher dividends to shareholders. 

In this article, we will explore each component to determine whether Costco (COST), a dividend stock, is an attractive investment at its current price.

Overview of Costco

Costco Wholesale Corporation operates membership warehouses all across the world. It has 602 warehouses in the United States, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the U.K., 18 in Korea, 15 in Australia, 14 in Taiwan, and the rest in China, Spain, France, Iceland, New Zealand, and Sweden. 

COST is the world’s third-largest retailer, with a market capitalization of $323 billion. Founded in 1976, it now operates 874 warehouses worldwide and employs 316,000 people.

Source: Costco Investor Relation

Along with its retail stores, Costco also operates gasoline, pharmacies, optical, food courts, and tire installation centers. Its merchandise spans many categories, such as groceries, appliances, automotive supplies, toys, hardware, sporting goods, jewelry, cameras, books, housewares, clothes, health, and furniture.

Shares of Costco currently trade for around $729, which aligns closely with the high end of its 52-week price range, which spans from $466.15 to $787.08. This suggests that, at its current share price, Costco may not present an attractive investment opportunity.

Costco Stock Dividend History, Growth, and Yield

We will examine Costco’s dividend history, growth, and yield to decide if the stock has a safe and reliable dividend.

Costco is a Dividend Contender with a 20+ year dividend growth streak. On April 10, 2024, Costco declared a 13.7% dividend increase, marking its 21^st year of increasing its dividend. The new annual dividend amounts to $4.64 per share, more than eleven times the dividend Costco initiated at $0.40 per share in 2004.

The firm also periodically pays a special dividend, which is paid from excess capital. The last one was in 2023 for $15 per share.

Dividend Growth

Costco has an impressive dividend growth streak of 21 consecutive years, as it continued to raise its dividend without fail even through the great recession and the pandemic. According to Portfolio Insight, Costco has increased its dividend by 12% CAGR and 13% CAGR over the trailing five and ten years, respectively. 

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Source: Portfolio Insight

The dividend growth history has been very consistent, which is vital to dividend growth investors. Furthermore, Costco has outperformed Portfolio Insight’s Quality Range for Consumer Staples companies in terms of dividend growth.

Dividend Yield

With a current share price of around $729, Costco has a dividend yield of just 0.64%, which is paltry compared to the 1.3% dividend yield of the S&P 500 Index. While Costco’s dividend yield is low, the dividend has doubled since 2018, and the company continues to grow the dividend quickly.

Costco’s current dividend yield is 16% below its five-year average yield of 0.76%, which could indicate that shares are overvalued here.

Dividend Safety

Costco is projected to earn $15.94 per share for fiscal year 2024. And with the $4.64 dividend payment, Costco is expected to pay out 29% of earnings. This is a reasonable and safe payout ratio for a mature company that is still growing steadily. This consistent payout ratio enables the company to continue growing the dividend rapidly. We are confident that Costco will reach Dividend Aristocrat status in four years.

Costco Revenue and Earnings Growth

Costco has grown its earnings per share (EPS) at a higher rate than its revenue in each of the last one-year three-year, five-year, and 10-year periods, proving its reliable growth profile and efficiency. For the last ten years, Costco has increased its revenue and EPS by 8.7% and 12.2%, respectively. However, in the previous year, this growth rate came down to 6.2% and 6.7% for revenue and EPS, respectively.

Even so, analysts project that FY 2024 will produce year-over-year EPS growth of 12.6%, and in FY 2025 and 2026, Costco is likely to grow EPS by 9.4% and 10.1%, respectively.

Costco Stock’s Competitive Advantage and Risks

Costco’s membership program is a competitive advantage for the retailer, providing a recurring and stable source of nearly pure profit. Its membership program spans 73.4 million households and extends to 132 million cardholders. This membership is also sticky, boasting a high renewal rate in the U.S. and Canada of nearly 93%. In the last twelve months, Costco earned $4.7 billion from membership fees, while its dividend costs $1.8 billion annually.

Source: Costco Investor Relations

Another advantage of Costco is its private label brand, Kirkland Signature, which is known for being high quality and is offered at a great price compared to competitors. These products are also sold in bulk, resulting in higher revenue to Costco.

The firm operates in a competitive business with many other retailers that have similar business models. Operational missteps may result in loss of market share.

Valuation for Costco

Based on Costco’s present share price and EPS projections, the company is trading at a forward P/E ratio of 45.7X. This valuation is a 22% premium to its five-year average valuation of 37.4X. Its price-to-sales ratio is even more stretched, at a 35% premium to its five-year average. If Costco reverted to its five-year average P/E ratio of 37.4X, its stock would trade at $596.

As we mentioned earlier, with a dividend yield of 0.64% compared to its five-year average of 0.76%, shares appear overvalued. If Costco traded with a dividend yield of 0.76%, its price target would be $611.

By almost all measures, Costco is a very expensive stock today.

Final Thoughts on Costco Dividend Stock Analysis

Costco has an impressive record of consistent double-digit earnings and dividend growth to reward investors. However, the company’s share price has run up by 51% in the last one-year period, stretching its valuation. Additionally, while Costco stock has a strong history of dividend growth, the starting yield is low at 0.6%. As a result, Costco shareholders will have to rely on the company to grow its earnings significantly to justify its elevated share price. 

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