Retail has become a market with clear winners and losers. The struggling companies keep closing stores, going bankrupt, and announcing turnaround plans long on buzzwords, but short on actual transformation.

The winners, however, keep gaining in strength partly because pivoting to the omnichannel, faster-delivery model customers demand costs money. That's not likely to change, and it gives market leaders Walmart (NYSE:WMT)Target (NYSE:TGT), and Costco (NASDAQ:COST) an advantage. These companies are innovating while being steadily profitable and paying a dividend.

A person leaves Target with a full cart.

Target, Walmart, and Costco have all invested in delivery options. Image source: Target.

Winners keep winning

Amazon (NASDAQ: AMZN) has forced retailers to operate on a sort of accelerated clock where table stakes change quickly. Two-day delivery was once the standard, and now that has been raised to one-day, and for some items, same-day. Retailers have to see what the online giant does and then decide if it's worth following.

Costco, because it's membership-based, may not have to match Amazon move for move, but most chains have to or consumers will simply switch to the digital leader. Walmart and Target not only have to match Amazon move for move, but they also have to build out a fully omnichannel model that supports being able to deliver online and same-day orders from stores.

Keeping up with Amazon is expensive, but all three of these retailers have the resources to do it. Many others don't and will have to pick and choose what moves to make, which is a much riskier path. This is a case where any of these retailers can spend on something that fails as long as it's also investing in things that succeed.

Walmart and Target have done this extensively in testing things like curbside pickup and smaller-format stores. They're continuing to do so in areas like using drones (for delivery and inventory) and using robots in stores. Costco has not had to evolve as quickly due to its membership-based model, but it has steadily expanded while growing its digital operation and delivery options.

The numbers are strong

When evaluating a dividend-paying stock, you want to see a company that has enough profit to not only pay the dividend, but also to properly invest in its business. There's no exact formula for that (Walmart and Target likely need to invest in emerging technology more than Costco), but you want to see continued investment and expansion. All three of these companies have clearly invested in evolving their business models while adding stores, and all three are steadily profitable.

  • Walmart: $11.2 billion in free cash flow in the first half of 2019, $1.5 billion spent on dividends (and $1.6 billion on share buybacks).
  • Target: Second-quarter operating income of $1.32 billion, $328 million in dividend payouts, and $341 million in share buybacks. This followed Q1, where operating income was $1.13 billion, the dividend cost was $330 million, and $277 million went to buybacks. 
  • Costco: The warehouse club paid dividends of $0.57 in each of the past three quarters and will pay $0.65 on Nov. 15 ($2.36 over four quarters). It had full-year operating profits of $8.26 per diluted share. Costco has authorized $4 billion in share buybacks by 2023.

Direct comparisons can be challenging because companies report income and expenses in different ways. What's clear, however, is that these three retailers can easily afford their dividends (and Costco may even offer a special bonus dividend) while continuing to invest in their businesses.

In some cases, it's not easy to tell which companies have made back-end investments. For Target and Walmart, however, the changes are visible as you see revamped stores, curbside pickup, and in-store pickup kiosks. Costco's changes are perhaps more subtle, but it has made heavy digital investments and offers multiple delivery options while steadily opening warehouse locations.

It's not impossible for one of these three retail leaders to stumble, but they all have the capital to weather some mistakes. These are strong bets keep growing while continuing to return money to shareholders.