There are some 4,000 publicly listed companies in the U.S. That many choices can make it difficult to choose the right stocks to hold in your portfolio. You certainly don't want to hold too many since you risk over-diversifying.
While I'm not suggesting holding just one stock since that presents risks, you can certainly pick your favorite. Asking yourself which company you would buy if you could only choose one is a good exercise to narrow your choices and pick winners. Hence, it needs to be a special company.
It's time to see why Costco Wholesale (COST 1.57%) makes the grade.
Image source: Getty Images.
Value proposition
Costco serves its members well by offering low unit prices on a wide range of goods and services. This simple formula continues to work well for the company.
Looking at membership growth tells you that people remain attracted to Costco's warehouses. Paid memberships continue to grow, ending the last fiscal year at 61.7 million, up from 53.9 million two years ago. The company's latest fiscal year ended on Aug. 29, 2021.
Meanwhile, renewals continue to hover at around 90%. Last year, 91% of U.S. and Canadian members continued their membership.
Increasing membership and high retention is an excellent combination. That's because these membership fees flow to the bottom line, accounting for 2% of revenue but more than three-quarters of Costco's net income. No wonder its profitability continues to grow. In the latest quarter, covering the period that ended on Nov. 21, 2021, operating income grew to $1.7 billion, or better than 18% growth.
Expansion opportunities
Fortunately, Costco hasn't saturated the market with its stores. There's still plenty of room for growth. It continues to steadily add 20-30 warehouses per year, ending last fiscal year with 815.
The company opened eight warehouses in the first quarter and is planning on another 19 for the year. As part of its expansion, management seeks to open more international locations. This is a relatively untapped area for Costco, with just 146 locations at year end. In the first quarter, it opened second locations in France and China and a fourth store in Spain.
It plans to increase capital expenditures by about 10% this year to $4 billion. Management has earmarked most of this for new international locations as well as e-commerce and logistics.
Potentially large payouts
The board of directors has seen it fit to raise dividends annually since making the first payment in 2004. While that's nice, there are potentially larger cash payouts on the way.
That's because Costco has a history of making large, special dividends. Since 2012, the company has paid four of them. These have been between $5 and $10. The most recent special payment was in December 2020, when Costco rewarded shareholders with a $10 payout.
The company's profitability translates into plenty of free cash flow. Last year, it was $5.4 billion. It used part of its cash stockpile to pay the special dividend, which comprised the majority of the $5.7 billion paid. Typically, annual payments run about $1.5 billion.
Costco operates a simple business that it executes to perfection. That generates a lot of profitability. It's no wonder Costco's shares have gained over 210% in the last five years, more than double the S&P 500's 97%. As it continues to attract and retain members, the stock remains poised to continue this market-beating performance.
