In a time when folks are on the hunt for all sorts of high-flying assets, we shouldn’t ignore legendary fund manager Peter Lynch’s “invest in what you know” credo. Costco Wholesale (NASDAQ:COST) stock offers familiarity and low volatility. While Costco probably won’t make you wealthy overnight, the long-term returns have been substantial.
Indeed, during the era of the Covid-19 pandemic, Costco shares are a perfect “invest in what you know” portfolio holding. Even a full year after the onset of the pandemic, Costco stores are often packed with shoppers.
Leveraging the membership business model has undoubtedly contributed to Costco’s success. Impressively, the big-box retailer’s membership renewal rate in the U.S. and Canada is 91%.
So, should you renew your membership to the club of Costco shareholders? Even though the price of admission is higher than it used to be, you might find that membership in this club has its benefits.
A Closer Look at COST Stock
Over the years, simply holding COST stock has proven to be a winning strategy. The share price has literally doubled within the past five years.
The stock hit a 52-week high of $393.15 on Nov. 30. However, the share price then tumbled to the $311 area.
That actually turned out to be a prime buying opportunity as COST stock quickly recovered. Now the stock’s back to $372.
Is the stock’s valuation a concern? That’s a tough call. Currently, its trailing 12-month price-earnings ratio is 38x. This isn’t extremely low or high, though value-focused investors might wish to see a P/E ratio closer to 25x or 30x.
I should also mention that just recently, Costco’s board of directors approved a 12% dividend hike. More specifically, Costco will raise its upcoming dividend distribution from 70 cents to 79 cents.
Year after year, Costco has consistently raised its dividends since 2004. So, COST stock has something to offer to income-oriented investors. And if the stock’s valuation seems high, perhaps a dive into the data will quell your concerns.
Marking a Terrific Month
If you need some data to justify the steep rally in Costco shares, then I’ve got some good news for you.
Reportedly, Costco’s sales for March 2021 increased by nearly 18% to $18.21 billion, compared to $15.49 billion in March 2020.
This comes on the heels of Costco’s already impressive February sales, which rose 15% to $14.05 billion.
Here are a few more encouraging stats for the month of March:
- Same-store sales were up 16%
- U.S. comparable-store sales increased by 13.9%
- Online sales surged 57.7%
That last one, the online sales figure, impressed me the most. Sure, there’s plenty of foot traffic in Costco stores, but the Covid-19 pandemic has enhanced the importance of e-commerce.
I believe that if Costco can maintain its growth pace in online sales, the store should be able to generate strong revenues throughout the year.
Not Just the Stimulus
You might detect a hint of skepticism in the tone of Oppenheimer analyst Rupesh Parikh’s recent assessment of Costco’s sales growth.
“We suspect U.S. trends, similar to others, likely benefited somewhat from recent government stimulus, but it is difficult to quantify precisely,” Parikh commented.
Of course, Parikh isn’t saying that stimulus checks were the only reason that Costco posted such strong sales growth in March.
And indeed, there’s no denying that the “stimmy checks” were probably a contributing factor.
Nonetheless, Costco deserves credit for leveraging its membership business model effectively, and for keeping prices low enough to get people to shop at Costco during these challenging times.
In any case, Parikh maintains that Costco is a top pick for his firm. Furthermore, the analyst gave Costco shares a $30 price-target boost to $400.
The Bottom Line
Should you own COST stock for the consistent dividend payouts? Or should you hold it because Costco’s been posting strong sales growth?
The right answer is that you can own the shares for a host of valid reasons. And if you hold the stock long enough, your returns should easily justify whatever bull thesis you came up with.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
