Costco Wholesale (COST 0.63%) is trading right around $1,000 per share. For many investors, that high a number can induce a bit of sticker shock. That's understandable, but its current price tag isn't necessarily indicative of overvaluation.
NASDAQ: COST
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The valuation concern is valid, however, as Costco's forward P/E ratio is just under 50, and its trailing P/E is just over 50. That's expensive for the industry, but Costco has built a business unlike other retailers. Costco boasts membership renewal rates above 90%. This creates cash flow predictability and a competitive moat.
Also, because of Costco's size, it can buy products in enormous quantities and pass those savings on to consumers. This is a flywheel that is difficult for competitors to disrupt. Consumer Reports recently completed a study that found Costco's prices are 21.4% lower than rival Walmart's.
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Costco's financials just keep improving as well. In its second-quarter earnings, Costco reported a 7.4% year-over-year increase in net sales and a 22.6% increase in digital net sales. Net income for the quarter was more than $2 billion, and $4.58 in diluted earnings per share.
The company also announced on April 15 a $0.17 increase in its quarterly cash dividend. The annual dividend payout now totals $5.88 per share.
Costco's share price certainly isn't low, but paying a premium has historically turned out well for the company's investors. The $1,000-per-share milestone isn't a warning sign; instead, it's a feature of a well-run company that's firing on all cylinders.
