3 Reasons to Be Bullish on Costco Stock
February 2, 2017
Costco Stock Is a Unique, Rewarding Retailer
Costco Wholesale Corporation (NASDAQ:COST) stock is another that investors shouldn’t just brush off.
Costco is located in the retail segment of the market. But while investors may think that it’s best to avoid the retail segment due to the dramatic changes occurring thanks to e-commerce, Costco serves as a rare exception. That’s because of Costco’s unique business model, charging customers a membership fee to enter its stores—and the number of members is seeing growth each year.
Let’s take a bigger peek at Costco stock to understand why there are opportunities for further growth.
What Shareholders Take Away
Costco stock is yielding 1.11% at this time, calculated via the trading price of $162.54.
COST stock has been paying a dividend since 2004, with the policy being reviewed annually every April. The dividend has seen growth every year since its inception, increasing 350%.
The current payout ratio for Costco stock is a very conservative 31%, meaning the dividend pays $0.31 for every dollar of earnings. Such a conservative payout ratio speaks well for future dividend hikes
Costco has also put out special dividends on top of the regular ones, rewarding shareholders with them twice in the dividend’s history. This was done because of surplus cash on the balance sheet, as well as management wanting to reward shareholders.
Strong Management Team
The strength of a company is based on that of its administration and the results of its decisions, making Costco’s worth looking at.
The first point of interest is the share price performance against the index. Over the past 10 years COST stock’s price has increased 189%, compared to 60% for the S&P 500 Index. This matters because investors have bid up the stock based on management’s performance.
There is more evidence of the outstanding share performance to be found deeper in the financial statements. Over the same 10-year period, revenue has nearly doubled, while net income has more than doubled.
One reason for such great performance on the top and bottom lines of the financial statements is the 66% increase in the return on equity (ROE) over the past decade. The return on equity is a profitability ratio which measures the ability to generate profit from its shareholders’ investments in the company. Costco’s ratio has gone from a 12% ROE to just north of 20%.
Steady Business
Costco stock is based in consumer staples—essential products that are needed every day, such as food and household items. Consumer staples products will contribute to a company’s sales, no matter if an economy is in the growth stage or a recession.
So while Costco’s sales performance in the most recent recession (2008) came in with zero growth in sales numbers, there wasn’t a huge hit to revenue. And if revenue had dropped, it could take some time to pick up steam again. As an investor, this is important because a major goal is to preserve capital put into an investment.
Final Thoughts on Costco Stock
A unique retailer, Costco has rewarded shareholders with dividend payments, special dividends, and a conservative payout ratio that should make them optimistic about future dividend hikes.
And with COST stock being in the consumer staples segment of the market, there should not be any worry about huge swings in sales figures.
