Walmart (WMT +0.86%) operates big box stores, grocery stores, and membership-based club stores. Costco (COST +1.09%) only runs club stores. That said, both are gigantic retailers, claiming the top two spots on the list of the world's largest consumer staples companies.
Is one a better buy than the other?
Image source: Getty Images.
Why you might want to avoid these stocks
If you have a value bias, you probably won't want to buy either of these iconic retailers. Both have price-to-sales, price-to-earnings, and price-to-book value ratios that are well above their five-year averages. Very clearly, they are expensive today. However, they aren't just expensive relative to their own histories. Their P/E ratios are also well above the market's average P/E, so they are expensive on an absolute basis, as well.
Dividend investors won't be interested, either. Walmart's dividend yield is a miserly 0.8%, which is even lower than the S&P 500 index's (^GSPC 1.23%) anemic 1.1% yield. Costco's dividend yield is even less compelling than Walmart's, at just 0.5%.
Who might be interested in these retailers?
If value investors and income investors are out, the last group that might find Walmart and Costco attractive are growth investors. On that score, Costco probably has an edge. It isn't nearly as large as Walmart, and it is still having material success expanding its geographic reach.
NASDAQ: COST
Key Data Points
Moreover, Costco's focus on the club store format provides it with an annuity-like income stream from its membership fees. These fees make up around half of its gross profits, which gives management a tremendous amount of leeway with regard to product prices. Essentially, Costco can accept lower margins than peers and, thus, keep its members happily renewing.
NASDAQ: WMT
Key Data Points
Only part of Walmart's business offers a similar long-term positive. Investors are largely upbeat about the stock right now, as belt-tightening consumers are trading down to Walmart's big-box and grocery stores because of the retailer's low price focus. That could quickly change if economic conditions improve and customers trade back up to more premium retail experiences.
Neither is bad, and neither is cheap
At the end of the day, Walmart and Costco are both well-run businesses. Walmart is even a Dividend King, with more than 50 consecutive annual dividend increases. The problem is that both stocks appear expensive right now, making them poor choices for many investors. If you do intend to buy one, however, Costco's business model appears to be better positioned for long-term success.
