In a recent survey by the big-four tax firm, KPMG, 91% of chief executive officers (CEOs) said they expect a U.S. recession within the next 12 months. And with just one-third of CEOs predicting a mild and short recession, things could get rough in the near future.
That's why now could be a great time to position your investment portfolio for a recession. The warehouse retailer, Costco (COST 3.25%), looks like a buy for investors seeking to strengthen their portfolios. Here's why.
NASDAQ: COST
Key Data Points
Costco has a mostly recession-resistant business
Since its founding in 1976 under the Price Club name, Costco has grown to a market capitalization of $214 billion. This makes the company the largest membership-based warehouse club business in the world. How did Costco achieve this feat?
Costco sells grocery items and gas to its members. Since these products are essential to sustaining life in the developed world, customers basically have no choice but to buy them from somebody.
And because of Costco's tremendous size and scale, the company is able to sell these items to customers at rock-bottom prices. These bargain prices are enticing enough to consumers that they sign up for Costco memberships that range from $60 annually to $120 annually.
And customer-renewal rates for annual memberships at Costco come in higher than 90%. Given that the sale of these memberships comprises 73% of Costco's net income, this leads to consistent profitability for the company.
Consumers are likely to become more value-conscious with a recession potentially lurking around the corner. This will benefit Costco further because of its undeniable value proposition. That is why analysts anticipate 11% annual diluted earnings-per-share (EPS) growth over the next five years from the company.
Image source: Getty Images.
Costco could become a Dividend Aristocrat
Stacked against the S&P 500 index's 1.7% yield, Costco's 0.7% yield is modest by comparison. But with 18 consecutive years of dividend hikes under its belt, the company is on track to become a Dividend Aristocrat in 2029.
This is because Costco's dividend-payout ratio was just 25.7% in the previous fiscal year ended Aug. 28. That leaves the company with the capital needed to open additional stores and grow its membership base, as well as to repay debt. This is why I believe that Costco's dividend will grow at a faster clip than earnings over the foreseeable future, which could result in a doubling of the dividend in another five years.
It has rich valuation that is justified
Despite the fact that the current environment is arguably favorable to Costco, the stock has shed 14% of its value year to date. This is better than how broader markets have fared so far in 2022, yet it could set Costco's stock up to rocket higher over the next 12 months. Analysts have an average 12-month share-price target of $553, which is 14% upside from the current $487 share price.
At first glance, Costco's forward price-to-earnings (P/E) ratio of 30.3 seems steep compared to the average discount stores industry-forward P/E ratio of 22.6. However, the company's 11% annual earnings growth potential is far superior to the industry average of just 6.9%. Thus, Costco stock could be a compelling pick for investors' portfolios to withstand a recession.
