Costco Wholesale (COST 0.34%) is one of the more successful retail stocks of the past few decades. Since its debut in the 1980s, the stock price is up nearly 55,000%. It attracted interest from Warren Buffett's Berkshire Hathaway, which held the stock until 2020, and Buffett's partner Charlie Munger is a longtime Costco board member.

However, a variety of factors over the past year or two are challenging the stock's value proposition. Even though Costco should continue to prosper, investors have three good reasons to approach Costco with caution.

1. Costco's valuation remains elevated

One longtime challenge for investors who want to buy Costco stock is its high earnings multiple. It currently trades at a price-to-earnings (P/E) ratio of 36. Nonetheless, even after falling from its high, the stock trades at a premium, maintaining a higher multiple than every primary competitor except for Amazon.

The P/E ratio has also climbed steadily. Until late in the last decade, investors could usually buy this company for less than 30 times earnings, with it falling as low as 15 times earnings during the Great Recession.

However, since 2019, the P/E ratio has consistently stayed above 30, even during the pandemic-induced sell-off in early 2020. By the middle of that year, Costco often sold for about 40 times its earnings, and that is about the time Buffett and his team exited the stock. The P/E ratio stayed above 40 for a time, though it pulled back in the recent sell-off.

2. Costco's growth is slowing

Additionally, the high valuation comes at a time when growth is slowing. In Costco's March 2023 sales report, comparable sales for the first 31 weeks of the fiscal year increased by 4.5% over the last year, with U.S. comparable sales rising by 5.7%. That is barely higher than the 5% increase in consumer prices the government reported in March, signifying negligible growth in real terms.

This also lags behind Costco's performance in March 2022, when comparable sales surged 15.1% for the first 31 weeks of the fiscal year versus the prior year, with U.S. comparable sales rising 16.1%.

Admittedly, Costco has typically reported low double-digit sales growth in past years, and investors should not rule out the possibility that sales growth could recover. Nonetheless, investors should question whether such increases justify its earnings multiple.

3. Costco generates lower-than-average dividend returns

Costco lags behind its competitors with regard to dividend payments. Its current payout of $3.60 per share yields just under 0.75%, well under the S&P 500 average of just under 1.6%. It also fares poorly against Walmart, whose shareholders earn a 1.5% return, and Target, which offers a cash yield of 2.7%.

Costco's periodic special dividends do not compensate for the low returns. In 2020, Costco shareholders received a $10 per share special dividend. Nonetheless, averaging that dividend over the last three years adds $3.33 per year to the payout and takes the yield to around 1.4%, a level that still lags industry peers and market averages.

Indeed, Costco could probably afford a higher payout. In the latest quarter, free cash flow was just under $3.9 billion, well above the $400 million quarterly cost of the current dividend. In 2022, the company increased the dividend by 14%, and considering its current dividend cost, it may want to maintain or possibly increase that pace of payout hikes to ease the minds of shareholders.

Should you buy Costco stock?

Costco is one of the best-run retail operations and will likely continue to prosper. Still, the retail stock remains expensive. Moreover, its slowing growth and modest dividend returns could create doubt in those wanting to open a Costco position.

In the end, sales growth will probably return, and it could easily beat the market over a long-term time horizon. Still, investors may find higher returns in lower-cost stocks, and that factor could deter growth in Costco stock.