Demitri Kalogeropoulos, The Motley Fool
·4 min read
Investors suspected that a special dividend was coming soon, but Costco Wholesale (NASDAQ: COST) has now confirmed the timing of that windfall. A $15-per-share cash payout will land in shareholders' accounts on Jan. 12, assuming they own the stock as of Dec. 28.
The retailer's management team prefers these large, one-time payouts over the more predictable dividend growth favored by rivals like Walmart. That's one more way that Costco stands out in the retailing niche.
Here are three other key things to know about Costco's $15 payout.
1. Costco's dividend is easily affordable from cash
The biggest clue that a special dividend was on the way was Costco's cash holdings, which recently landed near $14 billion. The last time the chain held that much cash, back in 2022, it promptly announced a $10-per-share special dividend.
There are some important differences between today's economic environment and the one that characterized 2020. Demand growth isn't nearly as strong today, for one. And interest rates are much higher, meaning Costco has an incentive to hold cash.
Yet the retailer still decided to be aggressive here. The $15-per-share payout amounts to $6.7 billion, its biggest special dividend by far. The company can easily afford it, however, as cash balances grew to over $17 billion in the fiscal Q1 selling period that ended in late November.
2. The dividend is a vote of confidence
Investors should look at the dividend as a vote of confidence about business trends, too. Costco announced in mid-December that comparable-store sales growth was solidly positive in recent months. Comps were up 3% in the core U.S. market and rose 4% globally. Customer traffic was robust at 5% growth while average spending declined by less than 1%, management said in a recent conference call with investors.
Costco has returned to impressive growth in its e-commerce business, too. That division, which sells a high proportion of consumer discretionary products like home furnishings, improved to a 6% increase from a 1% decline in the prior quarter.
Arguably the best news about the business is Costco's renewal rates, which continue to push into record-high territory. A full 92.8% of members in the core U.S. market chose to maintain their subscriptions this past quarter, suggesting that shoppers are very pleased with the value they're getting from their memberships.
3. Costco is not your average dividend stock
Income investors might still prefer to look elsewhere for their next stock investment. Dividend growth from Costco isn't nearly as predictable as it is from Walmart and Target, which have each steadily boosted their dividends for decades. In contrast, Costco's special payouts occur roughly every few years. The warehouse giant also commits to a smaller regular payout that yields just 0.6% today compared to Walmart's 1.5% yield and Target's 3%-plus yield.
Still, Costco has much stronger sales and earnings trends than these peers, partly because most of its profit is derived from membership sales. The chain is well positioned to extend its market share lead over the coming years as well given shoppers' high satisfaction with its merchandise offerings.
That's why looking at the special dividend as a bonus for patiently holding this growth stock makes more sense than viewing Costco as a dependable income investment.
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Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
3 Things to Know About Costco's $15 Dividend Payment was originally published by The Motley Fool
