Why Investors Should Love Costco's Dividend
There’s more than meets the eye when it comes to the membership-based wholesale retailer’s dividend.
Costco (COST 1.11%) shareholders have had an incredible run. Shares are up 60% over the last year and 208% over the past five. This obliterates the S&P 500‘s returns during both periods. Wall Street clearly loves this membership-based wholesale retailer’s stock. But what is it, exactly, about Costco that investors love?
We all know investors love the company’s business model, which flexes its scale to provide significant savings on high-quality products for its members. This, combined with a great customer experience, creates loyalty from existing members and attracts new members who want in on the good deals. Then, of course, there are the smaller yet fun (and arguably viral) aspects of its business, from its $1.50 soda and hot dog deal to its generous return policy.
But some investors may be unaware of another unique aspect of Costco’s business: the company’s approach to dividends.
The “special sauce” in Costco’s dividend
Right off the bat, investors should understand that there’s much more to Costco’s dividend than its paltry 0.5% dividend yield. On top of the company’s regular quarterly dividend, which currently comes out to $1.16 (or $4.64 annually), Costco occasionally pays out a special dividend to shareholders. Special dividends are essentially nonrecurring dividends paid out at somewhat random periods. The company’s last special dividend was $15, paid out to shareholders in one fell swoop on Jan. 12 of this year.
But here’s what’s interesting about Costco’s special dividend. It has a long enough history of resurfacing that it’s fair (and probably even wise) to anticipate more in the years ahead. In addition to its $15 special dividend this year, the company paid special dividends of $7, $5, $7, and $10 in 2012, 2015, 2017, and 2020, respectively.
Costco tends to pay out these dividends when its net cash position (total cash, cash equivalents, and marketable securities in excess of long-term debt) becomes significant. Costco’s net cash was $12 billion when it announced its last special dividend. This is impressive, given that many retailers operate with a net debt position.
As Costco’s net cash position recovers and possibly grows even larger, the company’s board of directors will likely consider paying shareholders another special dividend. So, though the timing and size of Costco’s next special dividend may be unknown, investors can say with almost certainty that one is likely on the horizon.
Strong dividend growth potential
As far as Costco’s regular quarterly dividend goes, investors can expect significant growth. This is primarily because the company’s payout ratio, when excluding its special dividend payment earlier this year, is just 26%. In other words, the company is paying out only about one-fourth of its earnings in dividends, leaving plenty of room for growth.
Costco’s revenue and earnings growth should also provide fuel for dividend growth. The company’s business is growing at an impressive clip, with sales in its most recently reported quarter increasing 9.1% year over year. Further, a recent increase to the annual fee it charges its members should help keep this rate robust in the coming quarters.
So, with a promising backdrop for continued dividend growth and the expectation for an occasional special dividend, Costco continues to look like a solid long-term investment for investors looking for a growing stream of dividend income.
Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.