Costco Wholesale(NASDAQ: COST) has been rewarding its shareholders in some big ways lately. On the heels of issuing a huge $15 per share special cash dividend late in 2023, the retailer announced this month that it will boost its regular quarterly dividend payout.
The new $1.16 per-share quarterly dividend will hit shareholders' accounts in May, and it's a modest raise when compared to the company's sporadic (the last one was in 2020) special dividends. Let's take a closer look at whether this latest dividend news makes the stock a more compelling buy today.
The new dividend
Costco hiked its quarterly dividend payment by $0.14 per share up to $1.16, which translates into a 13.7% boost. That pace was a bit faster than peer Walmart, which raised its dividend in February by 9%.
Yet Costco remains far stingier than its national peers when it comes to the yield on its dividend payments. The stock yields just 0.6% today compared to Walmart's 1.3% payout and Target's 2.6%. You could earn a 1.3% yield by owning an index fund that tracks the wider S&P 500.
Sure, Costco distributes sporadic (roughly every three years or so) special dividends when it is flush with cash, but you can't count on those arriving or how much they will be with anything approaching the regularity that income investors see from its committed annual dividends.
Where Costco's cash comes from
The good news is that Costco is in a stellar financial position to support its higher payout. Sales growth has been speeding up lately, with comparable-store sales gains landing at 8% in March after rising 6% in the previous month. Part of that was due to higher customer traffic at its warehouses, but the chain is also doing extremely well in its online segment.
E-commerce sales were up a blazing 28% last month, management said in an April 10 press release. That growth was likely powered by the sale of gold and other precious metals, which has been extremely popular among Costco members since the practice began a few months ago.
Costco was sitting on $9 billion of cash as of mid-February, which is down from the $13 billion that the company held a year ago. The decline was due to that one-time dividend payment that moved about $7 billion from its books into shareholders' accounts. It is generating roughly $5 billion each quarter from its operations, leaving it access to ample resources for the next dividend increase or special payout.
Why buy Costco stock
Costco's capital return policy isn't a good reason on its own to buy the stock. As mentioned above, there are more generous dividend payers in the market even within the chain's retailing niche.
However, investors should be thrilled to see that Costco is continuing to outpace its peers when it comes to traffic growth and that it can still find products that motivate its huge base of members to spend more cash at its stores.
These successes should make it easier for Costco to issue its next membership fee increase, likely in 2024 or 2025. Subscribers are renewing their subscriptions at a record 92% rate, after all, and traffic trends confirm that they remain highly engaged with the warehouses.
As a result, you might consider adding Costco to your portfolio if you haven't already. Yes, the stock is expensive (it is valued at double Walmart's premium). But Costco is more of a growth stock that will generate price appreciation than a value stock. Its measured approach to capital returns is a consequence of that focus on expanding its sales footprint.
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Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
