Costco Wholesale Corporation: Special Dividend Is a Major Sign of Strength

Costco Wholesale Corporation: Special Dividend Is a Major Sign of Strength

Costco Stock Returning Cash to Investors

For the most part, Costco Wholesale Corporation (NASDAQ:COST) has not been a particularly attractive income stock. Despite management’s willingness to return cash to investors, COST stock’s yield was never quite high enough to whet the appetite of most dividend investors.

But now the company is delivering a dividend bonanza.

On November 16, Costco’s board of directors declared a special cash dividend of $10.00 per share on the company’s common stock. The dividend will be paid on December 11 to shareholders of record as of December 2. (Source: “Costco Wholesale Corporation Declares Special Cash Dividend of $10 Per Share,” Costco Wholesale Corporation, November 16, 2020.)

To put that payment in perspective, Costco’s quarterly dividend rate stands at $0.70 per share at the moment. So essentially, the special dividend is more than 14 times that of the regular quarterly payout.

“This special dividend, our fourth in eight years, is our latest step to reward shareholders,” said Costco’s executive vice president and chief financial officer, Richard Galanti. “Our strong balance sheet allows us to pay this dividend, while preserving financial and operational flexibility to continue to grow our business globally.” (Source: Ibid.)

If you’ve been following my writing, this news should not come as a surprise. I always believed in the warehouse retailer’s ability to reward investors with a big cash payday. For instance, back in May 2018, I told Income Investors readers  that the company’s low payout ratio “not only leaves a wide margin of safety, but also gives Costco the possibility of paying another special dividend.”

Obviously, it’s hard to predict the timing of special dividends because, by definition, they aren’t expected to be recurring. But the special payout is now happening, some two years later. And since my May 2018 article was published, Costco stock has skyrocketed 98%.

Costco Wholesale Corporation (NASDAQ:COST) Stock Chart

Chart courtesy of StockCharts.com

The soaring share price is one of the reasons why Costco stock is not a particularly high yielder. At a given cash payout, a company’s dividend yield moves inversely to its stock price.

Furthermore, Costco has actually been raising its dividend. Consider this: when the company first set up a regular dividend policy, its quarterly dividend rate was $0.10 per share. Since then, management has increased the regular quarterly payout every single year—by a total of 600%. (Source: “Splits & Dividends,” Costco Wholesale Corporation, last accessed November 23, 2020.)

That’s a stellar dividend growth track record by any standard. But because COST stock has been soaring, its yield has always seemed subdued. Trading around $387.00 per share, Costco stock yields 0.7%.

The company has a growing business to back its rising payouts, even when the world economy is still in the doldrums due to the COVID-19 pandemic.

In the fourth quarter of Costco’s fiscal year 2020, which ended August 30, its net sales rose 12.5% year-over-year to $52.3 billion. Comparable sales, a critical measure of a retailer’s performance, surged 11.4%. Growth was across the board: in the reporting quarter, Costco’s comparable sales increased 11.0% in the U.S., 9.1% in Canada, and 16.1% at its other international locations. (Source: “Costco Wholesale Corporation Reports Fourth Quarter and Fiscal Year 2020 Operating Results,” Costco Wholesale Corporation, September 24, 2020.)

Because of the shift in consumer behavior due to the pandemic, a successful retailer also needs a strong online presence. Indeed, e-commerce has been a catalyst for Costco. In the company’s fourth fiscal quarter, digital sales rose a staggering 90.6%.

Net income came in at $3.13 per share for the quarter, marking a substantial improvement from the $2.47 per share earned in the year-ago period.

The growth in Costco’s financials means its dividends are more than safe. In full-year fiscal 2020, the company generated a profit of $9.02 per share while paying four quarterly dividends totaling $2.70 per share. That translated to a very conservative payout ratio of 29.9%.

Bottom Line on Costco Wholesale Corporation

At the end of the day, keep in mind that we live in an era when earnings are often adjusted. But cash dividends still have be paid in cash. So delivering a monstrous special cash dividend in a very challenging economic climate should be considered as a major sign of strength for COST stock.

Now, because special dividends are not meant to be recurring, I don’t expect Costco Wholesale Corporation to announce another one in the near future. What I do expect to see, though, is the company continue to raise its regular dividend year after year.

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