Costco Wholesale (COST 0.17%) is a proven winner in the retail arena. Beloved by its customers for the tremendous value it provides and its shareowners for the wealth it has delivered, Costco is a favorite among many.
Yet, despite this well-earned fanfare, fortune-building returns could still be had by investors who buy its stock today. Here are five reasons why.
1. Costco's membership model gives it a powerful competitive advantage
The profit Costco earns from selling membership plans allows it to price its goods only slightly above its costs. This, combined with its bulk purchases made possible by its massive customer base, makes it difficult and often impossible for other retailers to match its prices.
Moreover, once people pay a membership fee, they have an economic incentive to shop at Costco as much as possible to recoup their investment and maximize their savings. Costco further entices its members to visit its stores often by constantly varying its merchandise. This creates a treasure hunt-style shopping experience, which helps to funnel repeat traffic to its stores.
2. Costco is recession-resistant
Consumers value Costco's low prices even more highly during difficult economic times. The discount retailer, in turn, tends to gain market share during recessions and other periods of financial distress, such as the one we find ourselves in today.
With inflation driving shoppers to seek out bargains, people are flocking to Costco's well-stocked warehouses. A vast selection of low-priced food is enabling Costco to benefit as more people choose to eat at home rather than dine out. The retail chain's discounted gasoline is also shuttling more traffic to its stores.
3. Investors can expect consistent profit growth
All told, Costco ended its fiscal 2023 third quarter with nearly 125 million cardholders, representing year-over-year growth of roughly 7%. Its net sales for the first 36 weeks of fiscal 2023, in turn, grew by 5.5% to a whopping $160 billion, while its income rose by 4% to $4 billion, or $9.30 per share.
The gains furthered an impressive streak that's seen Costco's revenue and profits rise steadily over the past decade, despite the negative impacts of the global pandemic and inflationary macroeconomic backdrop in recent years.
COST EPS Diluted (TTM) data by YCharts.
4. Costco is a reliable income generator
With its steadily growing sales base and membership renewal rates that typically exceed 90%, Costco has a high level of visibility into its future cash flows. This enables the retail giant to pay a dependable cash dividend to its shareholders.
Costco initiated its dividend back in 2004 at $0.40 per share. Nearly two decades later, its cash payout stands at $4.08 per share. That's an annualized growth rate of approximately 13%.
The discount dynamo also likes to use some of its excess cash to buy back its own shares, which helps to support a rising stock price. Costco repurchased $162 million worth of its stock in the third quarter alone.
5. A special dividend is also likely on the way
Costco's current dividend yield of 0.8% belies its true income-generating potential. The retail leader has a successful track record of returning large sums of cash to its shareowners via special dividends.
These additional cash payouts, which are on top of Costco's regular quarterly cash dividends, have been sizable. Shareholders received special dividends of $5 in 2015, $7 in 2017, and $10 in 2020. The timing of those payments, which have occurred roughly every three years, suggests Costco's investors have another large special dividend to look forward to in the near future.
