Is It Too Late to Buy Costco Stock?

Warehouse club retailer Costco Wholesale (COST -0.72%) has been very kind to its investors over the years. The stock has gained 52% over the last year, more than doubled in three years, and soared 712% higher in a decade, all assuming reinvested dividends along the way. Across most time frames, Costco's returns left the dividend-adjusted gains of the S&P 500 index far behind:

But all good things must come to an end, right? Is Costco running out of rocket fuel or does the stock still look like a good investment after these market-beating gains?

Let's have a look.

Costco's premium price tag

First, Costco's stock strikes many investors as an expensive option. Shares are changing hands at the lofty ratio of 47 times earnings (P/E ratio) or 52 times free cash flow. That's a dealbreaker in some cases. After all, most retail stocks attract a certain type of value investor. Low valuation ratios are almost required in this sector. Target (TGT -1.20%) and Kroger (KR -0.58%) are more classical examples of value plays in the retail sector. Even mighty Walmart (WMT 0.05%) stretches the boundaries of what's acceptable to the average retail-industry investor:

Data collected from Finviz.com on 4/1/24.

Dividends make Costco even sweeter

A generous dividend policy sets Costco apart from many of its peers. Those payouts make a serious difference for long-term shareholders. That 10-year return of 712% would shrink to 546% if you didn't sign up for dividend reinvestments. The compound annual return falls from 23.3% to 20.5%.

Mind you, none of the other retailers in the table above come close to Costco's dividend-less returns, with or without their own dividend boosts. Still the payouts are a substantial reason why long-term investors love Costco's stock.

The secret sauce of Costco's success

Costco is fundamentally different from its retail peers in a couple of important ways:

• Membership is the model: Costco's model relies on membership fees, giving them room to offer rock-bottom prices on products and still turn a profit.
• Bulk packages for the win: Large quantities and limited selections are key to Costco's low prices and efficient operations.
• Treasure hunt atmosphere: A constantly rotating assortment of products creates a sense of excitement and discovery for shoppers.
• Kirkland Signature is a star: Their popular private label offers quality products at competitive prices, boosting customer loyalty.
• Happy employees create loyal customers: Costco's reputation for good employee treatment also fosters a positive shopping experience.

These key qualities form a unique customer experience built on unbeatable value. This approach also drives operational efficiency, making Costco a powerful force in the retail landscape.

Is it too late to buy Costco stock right now?

I don't expect Costco's competitive advantages to fade out in the foreseeable future. The secret sauce of this giant retailer's success lies in its corporate culture, and that won't change at the drop of a hat.

So Costco's stock has earned its premium valuation the hard way, and I expect the profit-based multiples to stay reasonably high in the long run.

Of course, there will almost certainly be dips and valleys along the way. Those ratios are currently soaring far above their 1-year averages, after all. Price-sensitive investors may be better off buying other stocks until Costco's lofty share price takes a breather.

On the other hand, some investors may prefer to jump in right away and perhaps add some lower-priced shares later. For instance, I'm prone to writing glowing reviews of incredible stocks and then forgetting all about them the next time I've got some investable funds to spend. If I don't jump on my best ideas as soon as The Fool's disclosure rules let me, I'll have another dozen great stocks to consider for my next investment. I'm human too, you know.

So I might seriously consider grabbing a few Costco shares this week, despite their nosebleed-inspiring valuation. Time in the market always beats timing the market, and Costco has this tenacious tendency to climb back from price dips with a vengeance.