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How Costco Wholesale Corporation Just Surprised Shareholders with $2.2 Billion

By Demitri Kalogeropoulos – Feb 2, 2015 at 9:14AM

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Costco investors can expect a special dividend payout to hit their accounts in early February.

There is nothing quite like an extra $2.2 billion to make shareholders feel special.

On Friday, Costco (COST -1.40%) announced a surprise "special" dividend of $5 per share in cash, payable to owners of the stock as of Feb. 9th. The one-time dividend is on top of the regular $0.36 per share quarterly payout.

Source: Costco

The warehouse retailer last issued a special dividend in late 2012. That was precipitated by the coming tax hike on investment income, and it was more generous at $7 per share.

But this upcoming surprise payout is no small potatoes. The total payment will amount to $2.2 billion, or slightly more than the $2.1 billion that Costco booked in total profit over the last 12 months.

Feeling flush
The warehouse giant has plenty of resources available to fund this payout. For one, it had $7.3 billion in cash and equivalents on its books at the end of 2014. Meanwhile, operating cash flow over the past 12 months was $4 billion, or almost 20% higher than in 2013. 

Inside a Costco store.

Those impressive numbers were powered by gains across the board on the key operating and financial metrics around the business in 2014.

Comparable-store sales were up 5% in the U.S. last year and 7% across Costco's global footprint. Membership income rose 6% while renewal rates climbed higher toward an incredible 90%. Profit margin held steady at almost 11% of sales. No other major national retailer can claim numbers like that, and the management team apparently wants to share more of the resulting good fortune with investors.

Debt is an option
However, the company also plans to take on new debt to fund at least part of this payout. That is consistent with what the company did for its last special dividend in 2012. At that time, Costco added $3.5 billion of debt before paying almost all of it out in the dividend. The debt was priced at a historically low average interest rate of 1.25%, which would likely be the case here as well. Costco now has $5 billion in long-term debt on its balance sheet, comfortably less than two times operating profits.

"Our strong balance sheet and favorable access to the credit markets allow us to provide shareholders with this dividend, while also preserving financial and operational flexibility to grow our business globally; and allowing for ongoing dividend and share repurchase activities," said Chief Financial Officer Richard Galanti in a press release announcing the payout.

In other words, this dividend will not have any impact on Costco's growth plans -- it still expects to open about 30 new warehouses this year. The only change investors should see is to the cash and debt balances. And shareholders will be $2.2 billion richer.

Demitrios Kalogeropoulos owns shares of Costco Wholesale and will probably blow his entire dividend check at one of the company's warehouses. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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