On Dec. 14, Costco Wholesale (COST 1.01%) announced its biggest special dividend ever: $15 in cash to each shareholder on record as of Dec. 28. The announcement led to a surge of interest from investors who want to take advantage of the windfall and the possibility of more to come. But what will Costco's long-term performance look like? Let's discuss whether the retailer has what it takes to continue rewarding investors.
Costco is trouncing the market
With its shares up by a solid 48% year to date in 2023, Costco's narrative is about more than just the special dividend. Since its founding in 1983, the company has pioneered a unique membership-based retail business model. It keeps costs low by buying items in bulk, streamlining selection, and simplifying store layouts to pass on savings to consumers, who pay an annual fee to access its stores. So far, the strategy is working well.
In the fiscal first quarter, total revenue grew by 6.2% year over year to $57.8 billion. And that's pretty impressive for such an already-massive business. While the membership fees represent a tiny fraction of sales, they boost loyalty and encourage shoppers to get their money's worth by spending as much as possible each month -- giving Costco the high sales volume it needs to make its low-cost strategy work.
What will the future hold?
Over the coming years, Costco has proven a safe bet because of its stickiness and large addressable market. Once consumers become members, they tend to stick around (management reports a global renewal rate of 90.5%). And the company's growth strategy involves opening new locations in the United States and fast-growing international markets like China, where it plans to open its sixth location in 2024.
Image source: Getty Images.
But while Costco has all the ingredients for healthy top-line growth, the bottom line might be even more exciting for long-term investors -- especially after the company's recent $15 special dividend announcement. This dividend is the fifth payout management has authorized in just over a decade, and the company has what it takes to continue returning value to its shareholders.
First-quarter net income jumped 16% year over year to $1.59 billion, and Costco's profits have been on a steady uptrend for the last 10 years. On top of that, it has a whopping $17 billion in cash and equivalents on its balance sheet. With the most recent special dividend only costing $6.7 billion, Costco can easily afford it, and possibly more in the future.
COST Net Income (TTM) data by YCharts
What about the valuation?
With a forward price-to-earnings (P/E) ratio of 43, Costco stock is significantly more expensive than the S&P 500 average of 26. And this is a high price tag for a mature company with a slow-and-steady approach to growth. That said, you get what you pay for in the market. Costco's deep economic moat, consistent profit growth, and massive pile of cash make it especially appealing to investors who prioritize safety and longevity. Shares could continue beating the market over the next five years.
