Costco Wholesale's (COST -1.85%) ability to source merchandise on the cheap and sell it at rock-bottom prices has translated to market-beating stock returns. A $10,000 investment in Costco stock 20 years ago would be worth nearly $100,000 today. That's almost three times more than what an index fund would have delivered.
Costco initiated its first dividend in 2004. Here's why it should remain a solid income investment for years to come.
16 years of dividend increases
Costco has increased its dividend payout every year since it started paying one. The current quarterly payout is $0.70 per share, giving investors an annual yield of 0.99% at the current stock price of $338.
A key consideration when buying a stock for the dividend is the payout ratio, which measures the percentage of earnings a company pays in dividends. In Costco's case, it has generally maintained a low payout ratio. Over the last year, it paid out 30.89% of its earnings. Most importantly, a low payout ratio shows that the company can maintain dividend increases even if a slow year in sales causes profits to dip.
Over the last few decades, Costco has been very consistent. Its focus on offering quality merchandise at low prices has attracted a growing base of 58 million club members who pay an annual fee of $60 for the privilege of shopping at a warehouse store.
Getting even stronger
Costco maintains such razor-thin margins on sold merchandise that most of its operating profit ends up being derived from membership fees. It keeps product costs ultralow by offering a no-frills service and sourcing in bulk volume. This strategy paid off in recent months as customers shopped for the best deals on essentials.
Comparable sales, excluding changes in gas prices and foreign currency, increased 14.1% for the August-ending fiscal fourth quarter. Traffic was slightly down, but members bought in greater quantity, which lifted overall sales.
E-commerce sales, which made up approximately 4% of total sales last year, increased by 90.6% year over year. The e-commerce channel accelerated at the onslaught of the pandemic in March and remained at high-growth levels all the way through August. Management cited strength in online grocery orders, home goods, beauty aids, appliances, TVs, and computers and tablets for the robust performance.
Moreover, Costco had an advantage during the pandemic with its large warehouses and wide aisles letting customers feel safe and comfortable as they practiced social-distancing protocols.
Earnings per share increased 26.7% year over year for the quarter and 9.2% for the year. Plus, Costco ended the quarter with $13.3 billion of cash and short-term investments on the balance sheet, which more than offsets its debt, putting the company in a plush financial position.
In July, Costco declared a quarterly dividend of $0.70 per share, payable on Aug. 14 to record shareholders as of July 31. If a pandemic can't harm Costco's business or disrupt dividend payments, that's a good indicator of a great dividend stock.
Costco is a long-term winner and should be around for decades, opening more warehouse stores and delivering returns to investors.