Why I'm Buying More Costco Now

Costco (NASDAQ: COST  ) was one of the first stocks I purchased for the Prosocial Portfolio I'm managing for Fool.com. It's one of my very favorites -- a company that sets high standards in an industry that generally keeps their standards pretty low. However, I have failed to add to my position.

That's about to change. Finally, I'm purchasing a little more of this gold-standard stock for the portfolio now, two years after the initial buy, and it's long overdue.

An increasing competitive advantage
Costco's been a real winner since I purchased it for the portfolio in December 2010, and before. The company has been a success both in terms of operations and stock price, even weathering the worst of the recessionary environment.

When I bought shares of Costco for the Prosocial Portfolio, which seeks to include positive environmental, social, and governance (ESG) factors in its design, I may have lost a few people. I got the impression that some people couldn't fathom how Costco could possibly be considered a socially responsible company.

Basically, Costco had a secret, and unlike many of corporate America's secrets, it was actually a nice one.

Costco is one of the few retail companies that gives workers living wages and important benefits like health insurance. Former CEO Jim Sinegal designed the company that way. Although sticklers for the bottom line often pushed at him to squeeze out more profits by cutting the bennies, Sinegal never backed down from doing the right thing.

Now that Sinegal has retired from the CEO post, current CEO Craig Jelinek has clearly continued to carry the torch high at Costco. As much as any changing of the guard can be disturbing at a public company, Jelinek hasn't changed worker-friendly and admirable aspects that make Costco special. He was an insider who was always down with the program.

Over the last two years or so, I've noticed that more consumers seem to be catching on that Costco sets itself apart from discounters such as Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) . It's not because of factors like its slightly different customer demographic, its bulk items, or its treasure hunt atmosphere. Those worker-friendly attributes do make for a happy workforce, and consumers feel good about a retailer with well-treated employees.

BusinessWeek recently reported on Costco's happy workforce, and how it differentiates itself from its industry in a big way. The average hourly worker at Costco makes $20.89 per hour, and that doesn't include overtime payments. Minimum wage is $7.25 per hour, and although Wal-Mart does exceed that bottom-rung mandate, it's not by much. Wal-Mart's average pay for full-time workers is $12.67 per hour.

In addition, 88% of Costco's workers have health insurance through the company, and its employees pay less than 10% of their plans' cost in premiums.

Here's Jelinek's refreshingly common-sense take on Costco's voluntary business decision:

I just think people need to make a living wage with health benefits. It also puts more money back into the economy and creates a healthier country. It's really that simple.

The BusinessWeek article (read it, it's great) uncovers quite a few outright oddities that set this retailer apart in a positive way. For example, Costco doesn't focus on bringing business school graduates on board but instead promotes people through the ranks of the company. In other words, you can start out as a cashier and have a shot at upward mobility at Costco. Apparently your work experience, performance, and potential mean more than a piece of paper (although Costco does assist in furthering workers' educations, too).

Go ahead and bust on that, I dare you. Here's another rebuttal: Google (NASDAQ: GOOGL  ) recently dropped a real bombshell. An executive admitted that according to its internal data, its focus on hiring workers boasting high GPAs and test scores generally added nothing to its business. Such qualifications were "almost worthless," and Google has started hiring a few workers who didn't even attend college. 

Apparently Costco knew this a long time ago.

Price vs. philosophy
Granted, Costco is also commonly viewed as one of the most expensive retail stocks out there. Its forward price-to-earnings ratio of 22 exceeds those of Wal-Mart and Target by a long shot. Both trade at 13 times forward earnings. Many value investors would tell you which of these stocks are the cheap ones.

Still, Costco's basic philosophies are so positive -- for workers, employees, and shareholders -- that I'm willing to pay the premium price. Some might accuse me of touchy-feely analysis, but I believe this is completely logical. These business practices promise long-term growth, increasing customer traffic, a rock-solid brand, and continued customer loyalty because of all the things Costco's management does right.

Companies like Wal-Mart and Target face major reputational risk that really could drive customers away over the long haul. Just days ago, Wal-Mart endured yet another employee strike. Target somehow squeaks by with a pretty solid brand and reputation, but the odd and generally unpublicized truth is that Target pays its employees slightly lower wages than Wal-Mart does.

In even more examples of reputational risk, Wal-Mart still faces a bribery investigation, and both Wal-Mart and Target have had to distance themselves from Paula Deen amid major controversy.

Obviously, Costco isn't immune to the occasional reputational dings. For example, Tiffany recently became the latest company that accused Costco of trodding on its brand by selling "Tiffany" rings that weren't actually from Tiffany. Still, occasional problems like that tend to be rectified, and not quite as soul-destroying as some of the controversies that have enveloped peers.

Stocking up on the gold standard
The only reason that it took me this long to buy more Costco was my hope for a temporary fall in Costco's price. The market sometimes delivers such opportunities, and one of the strategies I try to use when I can is to try to figure out when negative psychology outweighs a business's reality and jump on chances. If Costco's price falls from here, you'd better believe I'll add to the position again, too.

Gold-standard stocks can survive thick and thin. The Prosocial Portfolio is about positive business and positive returns. The intention is also to pick great companies to weather economic storms and market mayhem. In my opinion, Costco is one of the safest stocks investors can buy for the long haul.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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