If you haven't bought Costco Wholesale (COST 1.01%) stock yet, now might be the right time. It just announced several bits of fantastic news, and it's well-positioned to deliver high performance in the coming years, as usual. However, lots of investors love Costco stock, and it has gotten quite expensive. Is it a buy for the new year?
Why investors love Costco stock
Costco operates its chain of warehouse stores using a membership model that allows it to charge rock-bottom prices for its wares. Members pay an annual fee that generates loyalty and high sales volumes since shoppers tend to want to get the most value possible out of their memberships.
Sales growth had been sluggish recently after a period of elevated pandemic-fueled growth. But that slowdown was mostly due to shoppers shying away from the retailer's larger and more expensive items when their disposable incomes got tighter, and instead focusing on essentials or switching down brands. Costco's customer traffic numbers have remained strong throughout, as have its membership growth and renewal rates.
Now, top-line growth has started to accelerate again. Sales increased 6.1% year over year in its 2024 fiscal first quarter, which ended Nov. 26. Comparable sales (comps) rose 3.8%, and even e-commerce sales, which had been declining for some time, returned to growth with a 6.3% increase.
Earnings per share increased from $3.07 in the prior-year period to $3.58 this time. U.S. and Canada renewal rates were 92.8%, and the worldwide renewal rate was 90.5%, up from last quarter. The total number of household members increased 7.6% year over year, and executive membership grew as well.
That's a sweet spot for Costco to be in since that category accounted for 46% of total membership, but 73% of total sales. It also contributes more to net income, since executive members pay double the standard membership fee of $60. Membership income increased 8.2% from last year, or by more than $1 billion.
The much-anticipated dividend is here
Costco pays a quarterly dividend that at first glance doesn't look all that exciting. It yields only 0.65% at the current share price. However, it also has a history of paying special dividends on an irregular basis -- about once every 2.5 years or so -- and it just announced another one, its largest yet. Shareholders of record as of Dec. 28 will receive a payout of $15 per share. Its previous special dividends ranged from $5 per share to $10 per share.
Management had on prior occasions stated that it would pay its next special dividend at the right time, and it clearly sees now as that time. The company is cash-rich, and when cash reserves become plentiful, Costco distributes some to shareholders.
COST Cash and Equivalents (Quarterly) data by YCharts.
Cash has been increasing for a while, but it made sense that the company kept its special dividend on hold while there was extra pressure. Now that inflation has moderated and Costco's performance is improving, management feels more comfortable parting with more of its cash.
A much-anticipated membership fee hike is coming
Another announcement shareholders are expecting is word that the company is hiking membership fees. Based on the average times between fee hikes, Costco is already a bit overdue to impose one. When asked about it on the most recent earnings call, management said, "We like providing extreme value." The retailer knows its customers are still feeling the lingering impact of inflation, and it doesn't see a fee hike now as providing the right kind of value for its shoppers. Still, the company has said, "It's a question of when, not if."
But it's not just comps and fee income that drive sales and value. Costco operates 871 stores, including 600 in the U.S., and it's planning to accelerate new store openings. It has typically opened around 25 annually, and it plans to boost that pace to around 30. So far in its fiscal 2024, it has opened nine net new stores and is expecting to open a total of 31. It opened five stores in China last year for the first time and will open a sixth in its fiscal second quarter. These stores provide years of growth opportunities.
Costco stock trades at a premium price
Is there any reason not to buy Costco stock? The only obvious one would be its valuation. Costco stock trades at a price-to-earnings ratio of 45, which is rich. It's close to its 5-year high on that metric, and well above the 5-year average.
COST PE Ratio data by YCharts.
Some investors might see this as a reason to wait for a pullback to pick up shares, which is a valid view. However, I'm not sure when you're going to see one -- especially considering that if you buy before Dec. 28, you'll get the special dividend. If you see the long-term opportunity, which is compelling, keep in mind that you can't time the market. Costco is a great stock to buy even now, and it's likely to reward shareholders in 2024.
