Should You Purchase Dividend-Paying Costco Wholesale Corporation?

Should You Purchase Dividend-Paying Costco Wholesale Corporation?

As an Costco Wholesale Corporation member (NASDAQ: COST )), you might also consider investing in the popular warehouse club to receive dividends.



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But, what are dividend stocks? Dividend stocks refer to a payment that a company gives to its shareholders, typically issued in cash payment form, through extra shares, and possibly through other forms of payment from that company. The company’s board makes the decision to pay dividends. Membership business models are successful because they offer bulk items at lower prices, which ensures customer loyalty.

Does Costco meet your dividend requirements? Let’s look at Costco Wholesale Corporation and what the pros and cons are to investing in this popular dividend payer.

About Costco Wholesale Corporation

The first Costco opened in Seattle in 1983 and the Price Company and Costco merged in 1993 to become Price/Costco. The 1997 corporate name was changed to Costco Companies, Inc., and its corporate name was solidified in 1999.

According to our MarketBeat profile, Costco Wholesale Corporation operates membership warehouses beyond the United States (including Puerto Rico) and across the world, including the following countries:

  • Canada
  • The United Kingdom
  • Mexico
  • Japan
  • Korea
  • Australia
  • Spain
  • France
  • Iceland
  • China
  • Taiwan

The company offers a wide range of products, including the following:

  • Sundries
  • Dry groceries, meat, produce, deli and bakery products
  • Candies
  • Deli products
  • Appliances
  • Electronics
  • Health and beauty aids
  • Hardware
  • Garden and patio products
  • Sporting goods
  • Tires and automotive care products
  • Toys
  • Seasonal products
  • Office supplies
  • Apparel
  • Furniture
  • Housewares
  • Jewelry
  • Pharmacies
  • Opticals
  • Gas

The company successfully sells warehouse memberships for customers and entices customers with low prices on its products compared to traditional grocers and other retailers.

Learn more: What is a Dividend Aristocrat?

Pros and Cons of Investing in Costco

Let’s take a look at the pros and cons of investing in Costco Wholesale Corporation before you make a final decision about whether you might want to invest in the company.

Pros

First, the benefits of investing in Costco:

  • Moderate buy ratings: Most Wall Street analysts have issued a moderate buy rating for the stock, meaning that analysts believe the stock will likely outperform the overall market.
  • Margin: It’s worth noting that the company’s adjusted gross margin declined 17 basis points year over year to 11. 05% during the first few months of fiscal 2022. Other expenses were also reduced to 9. 04% of its revenue, lowered from 9. 85% in the prior-year period and its operating margin expanded to 3. 42% from 3. 33% YOY.
  • Sales growth: Costco’s sales have demonstrated consistent growth for more than two years. Net sales for the quarter increased 16.1%, to $50. 94 billion from $43. 89 billion in the previous year and in the first 24 weeks increased 16.4%, to $100. 35 billion, up from $86. 23 billion last year.
  • Ratings higher than competitors: Let’s take a look at Costco Wholesale versus Walmart, one of Costco’s top competitors. Costco’s net margin is 2. 60% compared to Walmart’s 2.36%. Costco’s return on equity (at 29. 71%) also beat Walmart’s return on equity.
  • Dividends: Costco Wholesale pays an annual dividend of $3. 60 per share and has a dividend yield of 0.7%. Walmart pays a $2 annual dividend. 24 per share and has a dividend yield of 1.7%. Costco Wholesale pays out 28.3% of its earnings in the form of a dividend. Walmart pays out 44.7% of its earnings in the form of a dividend. Both companies have healthy payout ratios that will allow them to cover their dividends for the foreseeable future.
  • Just about perfectly recession-proof: The warehouse retailer is practically recession-proof and continues to grow its revenue despite the pandemic and ensuing inflationary environment, most likely due to that clingy membership fee. In addition, the company uses its buy-in-bulk-to-save-money mantra to its advantage — it can both counter the threat of inflation and offset rising costs with membership revenue that it gathers.

Cons

Let’s take a look at the cons next:

  • High price-to-earnings (P/E) ratio: Costco’s price-to-earnings ratio was 39. 71 as of September 16, much higher than the entire S&P 500. The P/E ratio is the ratio of a company’s share price to its earnings per share. It indicates what the market will pay to buy a company’s stock based upon its past or future earnings. It’s a high ratio for an established company. However, most companies in Costco’s peer group trade lower than Costco.
  • Overvalued: Costco trades at a high valuation compared to its peers. It is in danger of being severely overvalued. A stock that is overvalued has a price that is not justified by its earnings outlook, and trades at a rate significantly higher than other companies similar to it. It can be used to determine whether the stock is overvalued. The stock itself trades at a high rate compared to Walmart, which trades at 17 times forward earnings and Target, which trades 11 times forward earnings.

Learn more: What are Dividend Kings Stocks?

Is Costco Wholesale Corporation a Dividend Possibility?

Costco Wholesale Corporation handles disruption well. Costco Wholesale Corporation has been able to withstand rising prices, supply chain problems, and other economic issues. This is due to its membership model which encourages people to return again and again.

Can you now name several reasons you might want to target Costco for your next dividend investment. Before you invest, make sure you research the pros and cons for each dividend stock. If you are picking individual stocks, do extensive research before you click the “buy” button. Even if you are looking at stocks with a positive track record like Costco Wholesale Corporation, this can help you save a lot of money over the long-term.

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