Costco Wholesale (COST -1.04%) isn't known as a dividend stock. After all, the company pays a dividend yield of less than 1% at the moment.
Investors like Costco because it has a wide economic moat in retail with its membership model, reputation for bargain prices on bulk goods, and long history of high customer satisfaction. Additionally, Costco's low prices and strength in groceries make it recession-proof as most of Costco's revenue comes from consumer staples or products that consumers buy regardless of the state of the economy.
While Costco's quarterly dividend may not turn any heads, the company has a long history of raising its payout every year, usually by more than 10%. However, there's another reason dividend investors may want to take a look at Costco. The company has paid a special dividend every few years, rewarding investors well beyond the regular quarterly dividend. Take a look at the chart below and see if you detect a pattern.
| Special dividend date | Amount |
|---|---|
| 12/2012 | $7 |
| 2/2015 | $5 |
| 5/2017 | $7 |
| 12/2020 | $10 |
Data source: Costco.
As you can see, Costco has typically paid a special every two to three years since the first one in 2012. The most recent one in 2020 may have been delayed by the COVID-19 pandemic. Based on its historical cadence, it would seem that investors are soon due for another special payout.
What Costco is saying about a special dividend
Costco's management generally likes to keep mum about any upcoming special dividend. That's understandable as giving investors advance notice would likely pump the stock price up.
However, management has alluded to another one-time dividend payout. Asked about paying a special dividend on the second-quarter earnings call in March, CFO Richard Galanti said:
And at some point, it's something you might see again. But I'm not trying to be cute. It's kind of like the membership question. We'll let you know when we do it.
Galanti said that the higher interest rate environment, which allows Costco to earn more interest income on its cash, didn't discourage it from considering a special dividend.
How much could the next special dividend be?
Costco delivered modest results in its just-reported third-quarter earnings report. Comparable sales rose 3.5% after adjusting for gas prices and foreign exchange, and revenue was up just 1.9% due to the impact of lower fuel prices and a stronger dollar.
The company's balance sheet also looks strong with $13.7 billion in cash, cash equivalents, and short-term investments.
Costco share repurchases have been minimal as has its regular dividend payout, though it did recently raise the quarterly dividend to $1.02. In other words, Costco is holding on to its cash rather than returning it to shareholders, which offers a good indication that a special dividend is likely to come.
With a stock price of over $500 a share and a market capitalization of $224 billion, Costco might need to pay out more than $10 a share to delight investors. When the company last paid out its special dividend in December 2020, the stock was under $400 a share, meaning the $10 payout counted toward a higher yield.
Given that fact, a $12 special dividend seems like a reasonable expectation. That would yield nearly 2.4% at the current stock price, and the company would be able to pay that out and only spend about half of the cash on the balance sheet.
Costco, of course, is solidly profitable with a net income of $4.1 billion through the first three quarters of the fiscal year, so it could replenish its balance sheet for that special payout in about a year.
Given the company's history and its lack of other good options to deploy its cash, don't be surprised if Costco pays a special dividend in the next year.
