Growing fears about inflation, soaring interest rates, and a potential recession have sent U.S. stocks into a bear market in 2022. The current market panic has even taken down shares of some companies that are poised to thrive in a volatile economic environment.
Costco Wholesale (COST 0.84%) is a prime example. The warehouse club giant has a durable business model and a long track record of growing its sales and earnings over time. It also boosted its quarterly dividend by 14% just two months ago. Nevertheless, Costco stock has lost more than a quarter of its value since peaking above $600 in April. That makes Costco a great dividend stock to buy in these turbulent times.
Business is booming
While Costco stock has been under pressure since late April, its core business hasn't shown any signs of trouble. Earlier this month, Costco reported that net sales jumped 16.9% in May on a 15.5% comparable sales increase. Excluding the impact of exchange rate fluctuations and the tailwind from rising gasoline prices, the retailer posted a solid 11.8% comp sales increase.
If anything, Costco's sales growth is accelerating. While demand is starting to cool off in some discretionary merchandise categories, sales of food and other staples are surging as consumers increasingly look to buy in bulk to save money. Inflation-related price increases on some items are also contributing to growth.
Profitability is holding up well, too. Last quarter, adjusted earnings per share (EPS) reached $3.17: up 12% year over year. Finally, Costco continues to grow its membership base at a healthy clip.
Inflation could give Costco an edge
While investors appear quite worried that inflation will hurt Costco, the company is well positioned to prosper in an inflationary environment.
First, Costco's scale gives it immense bargaining power with suppliers. That allows it to delay or mitigate price increases for all kinds of goods. By passing the savings along to its customers, Costco builds member loyalty and encourages people to visit its warehouses more frequently.
Image source: Costco Wholesale.
Second, Costco has historically paid above-market wages to its store employees. As a result, while its labor costs are rising because of recent wage increases, rivals face much greater cost pressure as they hike wages in response to minimum wage increases and competition for workers. This dynamic is widening Costco's cost advantage compared to the rest of the retail industry.
Third, Costco's gas stations offer the cheapest fuel in town across many of its markets. The recent surge in gasoline prices has made consumers even more keen to save money at the pump, which could drive growth in Costco's membership base and incremental store visits by existing members.
A safe dividend stock for long-term investors
Even after falling more than 25% since April, Costco stock isn't especially cheap: It currently trades for about 34 times the company's projected fiscal 2022 earnings of $13.04.
However, considering the company's ultra-stable business model and ample long-term growth prospects, Costco stock deserves its premium valuation. Costco has doubled its EPS over the past five years. While that includes some unusually rapid growth during the pandemic, the warehouse club leader can probably double its EPS again before the end of the decade.
While Costco has never been a high-yield stock, the recent dividend increase and the drop in its share price have boosted its yield to 0.8%. That still leaves it with a very conservative payout ratio of less than 30%. Moreover, Costco tends to pay a big special dividend every two to three years, boosting shareholders' returns.
All stocks carry risks, but Costco is one of the most reliable companies in the world. Its competitive advantages should serve it particularly well in the current economic climate. That makes Costco a great dividend stock for investors seeking relative safety in a volatile stock market.
