Is the Costco (COST) Stock Dividend Safe? Yes, But…

A couple of weeks ago, what many investors had feared regarding Costco Wholesale Corporation (NASDAQ:COST) was confirmed, even if only tacitly — the long battle with, Inc. (NASDAQ:AMZN) and Wal-Mart Stores Inc (NYSE:WMT) was finally creating a tangible headwind for COST stock, as the Costco stock price fell 6% in the wake of what was superficially a decent fourth quarter report.

Is the Costco (COST) Stock Dividend Safe? Yes, But...The issue? Margins and waning memberships.

Same-store sales were up an impressive 6.1% in the United States, handily topping estimates for only a 5.2% improvement. The profit of $2.08 per share of Costco stock was remarkably better than the year-ago figure of $1.77, and also better than analyst expectations. But gross margins fell 15 basis points on a year-over-year basis last quarter and, perhaps worse, membership renewal rates fell.

The company attributed that slowdown to a decision to stop accepting American Express cards, as well as the timing of its fee increase. Investors and analysts aren’t so sure it’s not something else, though. Clearly, more than a few people suspect matters will get worse before they get better.

Whatever the case, with the dust now settling on the company’s fourth quarter report and with analysts making adjustments to their forecasts, it’s time to start asking the next inevitable question. That is, if things get as bad for the retailer as some fear they will, is the Costco stock dividend in jeopardy?

One simple chart puts the matter in perspective.

Lots of Wiggle Room

Even analysts are conflicted as to what the future realistically holds for the company after its fourth quarter report. Wells Fargo analyst Zachary Fadem cautioned, “Despite notable positives, questions remain around an increasingly competitive environment and slowing member trends.”

Regarding a couple of new projects that Costco is taking on, BMO Capital Markets analysts noted: “[There’s a] risk these initiatives will weigh on margins over time and may be viewed as defensive.”

At the other end of the spectrum, Susquehanna analyst Bill Dreher explained shortly after the release of the retailer’s Q4 report posted on Oct. 5 that “Costco represents one of the most defensible names in retail and we believe many investors continue to overstate the speed and impact of competition entering its space. Given the after-hours weakness in the shares, we believe now is a good time to buy Costco shares and we reaffirm our positive rating.”

Point being, take everything, including the forward-looking estimates, with a grain of salt.

With that as the backdrop, as the graphic below shows, the Costco stock dividend is going to be fine — even if analysts are wildly overshooting how much profitability is in the company’s future. Over the course of the past four quarters, less than a third of Costco’s profit has been dished out to shareholders in the form of a dividend.

Costco results, outlook
Click to Enlarge

It should be noted that not all analysts may have yet chimed in with their updated outlooks, leaving the distinct possibility of downward adjustments of earnings outlooks in the future. The outlook, though, won’t change much until Costco gives these pros a clear reason to change their estimates.

It would also be naive to think the ongoing growth of Amazon and the increased competitiveness of Wal-Mart won’t take a toll on Costco sooner or later. It already is, in fact, and the membership-based retailer has been forced to step up its e-commerce business and begin delivering groceries as well. Neither initiative will be cheap for the organization, which already sports paper-thin margins anyway. It just doesn’t matter much in terms of the dividend. The company has plenty of room between even its worst-case scenario profits and what it’s giving back to shareholders.

Bottom Line on Costco stock

Don’t misread the message. While the dividend is protected by the massive disparity of what Costco is earning and what it is paying out, that doesn’t necessarily mean COST stock is poised to soar. Shares are largely being driven by measures like the pace of sales growth and margins, the latter of which is only likely to shrink going forward. The 6% tumble Costco stock took in the wake of its fourth quarter report is evidence that sales growth alone isn’t enough.

However, while the stock may be ready to give back some — maybe even much — of the triple-digit gain it’s mustered since 2009, the folks who bought in back then can still count on their dividend.

Let’s just hope it doesn’t take years for Costco to figure out how to stave off Wal-Mart and Amazon. Otherwise, Costco’s dividend growth will eventually start to slow as well. You’ve got some time before that becomes a major concern, however.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

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