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If I Could Only Buy 1 Stock Right Now, This Would Be It

By Lawrence Rothman, CFA – Dec 22, 2021 at 5:30AM

Key Points

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Costco offers solid growth and the prospect of special dividends.

A diversified portfolio helps spread out your risk. That's because you have other stocks to pick up the slack in case one company runs into trouble. However, it's OK to have a favorite. Hence, if you could only buy one stock, it should be the best of the lot.

Costco Wholesale (COST 1.54%) has been around for decades, but this isn't a mature, slow-growing company. Let's take a closer look to see what makes Costco so special.

Several people celebrating surrounded by computer monitors.

Image source: Getty Images.

A fine business

Costco operates large warehouses with a wide variety of goods and services at low prices to its members, who pay a fee to join. In the U.S. and Canada, the basic annual charge is $60. Executive members pay double that amount, but receive a 2% reward on their purchases that they can redeem at the warehouses.

Members clearly find it worthwhile. Renewal rates have hovered around 90% for years. And Costco keeps adding new members. The number of paid memberships has grown steadily, reaching 61.7 million at the end of the latest fiscal year (ended Aug. 29), up from 53.9 million only a couple of years ago.

Its loyal members continue to spend as demonstrated by years of same-store sales (comps) growth. In the first quarter, comps -- excluding changes in gasoline prices and foreign currency -- were up 9.8%. That follows a 13.4% gain last year. What's more, the growth has been accelerating. In 2017, comps increased just 4%.

The company's profitability has been growing at a nice clip too. Operating income in the latest fiscal year totaled $6.7 billion, 63% higher than five years ago. And it continues to improve. Thanks to strong execution in the first quarter, operating income grew by more than 18% to $1.7 billion -- and that's despite dealing with supply chain issues and higher costs plaguing the retail industry.

Nice growth outlook

This year's capital expenditure budget is over $4 billion, about an 11% increase from last year. Management is spending this mostly on logistics, e-commerce fulfillment operations, and expanding warehouses.

As of August, Costco had 815 warehouses, an increase of 100 from August 2016. And the company continues to add more, including another eight stores already in the first quarter and 19 more on the way in the next three quarters.

With stores continuing to do well and e-commerce sales growing rapidly (up 13.3% in the most recent quarter), this should all help Costco's top line growth.

Dividends with a kick

Costco has raised its dividend annually since initiating it in 2004 and there's every reason to think it will continue to do so. In May, the company increased its quarterly payout by 13% to $0.79 per share. The dividend yield currently stands at a modest 0.6% -- less than half of the S&P 500's 1.3%.

However, Costco has made a habit out of declaring large, special dividends every few years. A year ago, it paid out $10 per share and in May 2017 it gave $7. While there's no guarantee it will do so in the future, Costco's increased profitability means it's a good bet that the company will continue this practice.

Costco has proven it can offer a great value proposition to customers, and its sales and earnings growth don't look likely to stop anytime soon. Meanwhile, the company also provides improving dividends, which it supplements with special payments. It's this combination of growth and dividends that puts Costco at the top of my list of stocks.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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