Costco (NASDAQ:COST) stock has been a longtime favorite of investors. That's no surprise given that the retailer enjoys many competitive assets, led by its steadily growing membership income. Costco can offer consistently low prices, too, which has helped it gain market share through a wide range of industry selling conditions -- including the recent pandemic-related disruptions.

Those advantages aren't lost on Wall Street, though, and that's why Costco stock is valued at a premium to rivals like Walmart (NYSE:WMT). Let's take a look at whether it might be worth paying up for this high-performing business right now.

An employee restocks fresh produce in a supermarket

Image source: Getty Images.

Strong in any market

The COVID-19 pandemic has scrambled demand trends in the retailing world, but the disruption hasn't changed much about Costco's steady leadership position. The company notched 16% higher adjusted sales in the four weeks that ended in early November. Walmart's Sam's Club has been expanding at a slightly weaker pace, while BJ's Wholesale, which has a regional focus around the Eastern part of the country, is growing more quickly.

Costco hasn't been harmed by the shift in demand toward e-commerce, either. Its own digital channel is running higher by about 90% in recent months, comparable to Walmart's 79% increase in fiscal Q3. Costco is attracting more spending through the pandemic even as shoppers reduce the volume of their visits. Its product offering, which spans consumer essentials and more discretionary purchases like electronics, has been a hit with members in 2020.

Other key factors about the stock

Costco tends to direct most of its financial wins, whether its higher membership income or increased gross profit margin, toward supporting its market share position by lowering prices. That approach tends to trade low profitability in the short term for higher long-term growth and earnings. While its operating margin is lower than peers like Walmart and Target, it has roughly tripled annual net income over the past decade.

COST Net Income (TTM) Chart

COST Net Income (TTM) data by YCharts. TTM = trailing 12 months.

Costco stock has some drawbacks. It is one of the weaker players in the industry when it comes to direct cash returns, with a dividend yield that's below 1%. Target's and Walmart's yields are both closer to 1.5% as of late 2020. Costco's management prefers to keep the committed payout low while supplementing it with occasional special dividends like the recently announced $10-per-share bonanza

And shares are rarely available at even a modest discount. Today, investors have to pay roughly 1 times annual sales for Costco stock compared to 0.8 times for Walmart. Even a fantastic business can produce soft returns if you pay too high a price when you buy it.

That's always a key risk when considering purchasing shares of the warehouse leader. Yet Costco's 30% stock price rise this year isn't out of line with national retailing peers. Meanwhile, the company has earned its valuation premium through many selling environments, including recessions, sluggish rebounds, and demand surges like the one that investors are currently watching.

That success likely means you'll accumulate heathy returns by holding this stock over the long term, even if those gains aren't quite as predictable as they might be from a more aggressive dividend payer like Target.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.