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Costco Is a Lifetime Buy With Consistent Growth and Profits

COST stock - Costco Is a Lifetime Buy With Consistent Growth and Profits

Source: Helen89 / Shutterstock.com

  • Costco (NASDAQ:COST) has become a safe haven for investors.
  • Buyers are paying a premium over sales and taking a miniscule dividend.
  • There’s no end in sight to the positives for COST stock, making it a worthwhile buy.

I love Costco. I always have. It brings good memories of my late father, who took me to what was then the Price Club in the 1970s. I got my membership as soon as the company entered the Atlanta market. Our monthly visits are a family ritual.

The question is, however, whether there’s a limit. So far, investors haven’t found it. Costco stock entered March 17 with a market cap of $241 billion on 2021 sales of $203 billion. That’s an enormous premium. By way of contrast, Kroger (NYSE:KR) has a market cap of $40 billion on 2021 sales of $135 billion. Walmart (NYSE:WMT) is worth $407 billion on sales of $572 billion.

NASDAQ:COST Costco $561.35

Why the Premium for COST Stock?

Investors pay up for Costco because of its perceived safety. There are websites that seem to exist for no other reason than the latest Costco news.

This is generally good news. Costco expects to open 28 new stores this year, and each could cost $100 million to stock. Members like me will eat a membership price increase this summer. The last time prices were raised, Costco’s net income was closely tracking its membership income. In its last quarter ended Feb. 13, profits were 30% higher than fees.

Costco has a $4 billion capital expenditure budget, and not all of it goes into new stores. Costco has a “don’t touch” supply chain, buying by the pallet load and letting consumers break the bulk themselves. It supports just 3,700 stock keeping units (SKUs), an incredibly low number that is easy to manage.

What’s Coming Next at Costco

Ordinarily, there would be some reasons for concern. Inflation doesn’t just mean rising costs for goods. It also means rising expectations from investors, who need growth to beat it. But so far in fiscal 2022, Costco is delivering. Top-line growth for the first two quarters was 16%. Bottom-line growth was 23%.

Inflation can also lead to problems with workers. But Costco has always paid more than its competitors. Additionally, it is quietly improving its online presence. The company has built its own shipping service, with sales growing at 22%. It mostly handles items that won’t fit in your car, like TVs and furniture. These are the items customers want delivered — we can pick up our own rotisserie chickens, thank you.

Then there’s Costco Next, an alliance with 35 online merchants offering savings of about 20%. The company is only advertising this on its website for now. But more merchants are being added, so that could change.

Despite the stock’s premium price, 12 of the 16 analysts following Costco stock at Tipranks say buy it. Their average price target is just 7% ahead of where the stock traded March 17. But that’s just an indication of conviction.

The Bottom Line on COST Stock

Costco delivers predictable growth and profits. Over the last five years, capital gains have averaged 26% and the dividend is up 60%. If you were holding shares five years ago at $170, you collected $3.16 in regular dividends last year.

Then there are special dividends, issued when the company’s cash position gets big enough to merit them. The last one, delivered in December 2020, came to $10 per share. Costco has 443 million shares outstanding. At the start of February, it had more than $11 billion in cash on the books.

COST stock had a “mini-crash” in January, falling from $565 to under $480. That was your opportunity. But it’s still down half a percent on the year and a buy for long-term investors.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/cost-stock-is-a-lifetime-buy-with-consistent-growth-and-profits/.

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