I enjoy holding a diversified portfolio of top stocks, growth stocks, value stocks, and index funds. I believe this strategy yields the best of all worlds, providing growth opportunities while at the same time protecting my assets during times exactly like what we're in right now, when the market is volatile and growth stocks are plummeting.
If I could only buy one stock to add to my portfolio, I would want it to contribute to all of my long-term investing goals. It should have some growth and value, and specifically perform well under adverse market conditions. It's a no-brainer for me as to which stock I would choose -- it's Costco Wholesale (COST -0.55%), which meets all of my criteria and pays a dividend to boot.
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A winner in any economy
Costco is the 12th-largest company in the U.S. by sales, and it's been moving up in the rankings as sales continue to expand. Its differentiated model features membership fees and bulk-sized products, and most importantly, very low prices. Costco relies on the huge volume it moves to pad its sales instead of high markups like traditional supermarkets. The huge volume in turn makes it possible to offer the low prices, which feed the high sales in a positive cycle.
Costco's gross margin is typically in the 11% to 12% range, while a regular supermarket might be in the low 20s. That could amount to huge savings for the consumer, which makes a $60 basic membership worthwhile. And the membership model is what makes it all work. Fees were $967 million in the 2022 second quarter, accounting for nearly 75% of net income.
This is a popular concept at any time, and Costco enjoys high single-digit sales growth in a typical quarter. But it becomes a crucial customer shopping experience when the economy is shaky and shoppers are counting pennies. That's why sales growth has been elevated since the start of the pandemic, first because of the focus on essentials, and now due to inflation.
In the 2022 second fiscal quarter (ended Feb. 13), sales climbed 16% year over year. Earnings per share increased from $2.15 to $2.93 despite higher costs and supply chain problems. Costco uses its girth to negotiate prices from suppliers, absorbing some of the costs and getting them to as well in its efforts to keep prices low for its customers. It's able to do this because of the huge volume it turns over, which is beneficial to suppliers as well.
Costco is well-positioned to continue raking in sales in the current environment. It may revert to slower growth when the economy is in better shape, but more growth is almost inevitable.
Plenty of growth opportunities
Costco has achieved its phenomenal performance with just 828 stores globally, including 572 in the U.S. It takes a slow approach to store openings, opening about 25 annually. In fiscal 2022, it expects to open 28 net new stores. It experienced delays over the past two years, ending 2020 with 16 new units and 2021 with 20, and now it's making up some of that with more openings.
It opened its first warehouse in China in 2020, and it has two planned for 2022. That could be a huge growth market, offering the opportunity for many new stores in the coming years. It's opening stores in many other countries as well, such as France and Japan, in addition to more in the U.S., such as two new units in Florida. The opportunities for new stores remain abundant.
A great dividend
Costco has been paying and raising its dividend for the past 18 years. Its yield of 0.6% is well below average, but it also pays a special dividend when it has lots of cash, which has happened four times over the past 10 years. Management recently indicated that it might issue one again soon.
Costco is a reliable stock that gets investors through thick and thin. It's not a high-growth stock, but it has soundly beaten the market over time, often coming through when growth stocks feel the heat. It's a case of slow and steady wins the race, and if you're looking for a top stock that you can set and forget, consider buying Costco stock.
