Most large retailers boost their dividends in predictable ways, but Costco Wholesale (COST -0.47%) isn't your average retailer. The warehouse giant commits to returning a relatively small portion of its earnings each year in contrast to peers like Walmart. It then periodically surprises investors with windfall payouts. Another one of those big paydays might be on the way.
Determined to surprise
Costco's management team has decided that these special dividends are a better option than the typical return policy followed by most of its peers. "It's part of our DNA," CFO Richard Galanti said in a recent conference call with investors. Four prior special dividends have been paid in recent years, including a $10 per-share bonanza in late 2020. The previous one was three years earlier at $7 per share.
That history might suggest that these dividends are impossible to predict. But investors do have some clues suggesting a special dividend could be in the works. Galanti said last month that it's probably a matter of when, not if, for one. But the bigger tell is cash holdings.
Follow the cash
Costco's fiscal fourth-quarter earnings results in late September contained lots of good news for investors, including solid customer-traffic trends. Yet, the company's cash holdings are notable in that they are approaching a new record. The chain just crossed $13 billion of cash on the books, in fact. The last time Costco reached that level, management promptly paid out a special dividend that helped push cash holdings back down to around $9 billion.
COST Cash and Equivalents (Quarterly) data by YCharts.
There are important differences between now and then, of course. Interest rates are much higher today than they were in 2020, meaning Costco is earning substantial returns from simply holding cash. Sales-growth trends aren't as strong, either, and so Costco executives could be cautious about reducing cash holdings in case a recession begins pressuring customer traffic.
The chain is also due to announce a membership fee hike in the next few quarters. It wouldn't look great for a special dividend to head to investors' portfolios very soon after Costco raises fees on its subscribers.
Better dividend stocks
If you're looking for predictably rising dividends, you'd find more attractive income options elsewhere in the retailing industry. Walmart has increased its payout annually for 50 years, for example, and its yield is about double Costco's current 0.7% rate. Home improvement giant Lowe's has a multi-decade track record, and its yield is 2.2% today.
It is encouraging to know that, like its retailing peers, Costco intends to return excess cash to shareholders. Yet, most investors would likely prefer that the company commit to regularly returning some portion of its earnings to shareholders, with predictable raises each year.
It's always nice to have a surprise cash windfall hit your portfolio every couple of years, and Costco shareholders might get to experience that jolt soon. But my view is that management could take that cash and use it to craft a more dependable, less "special" capital-return program.
