Today I completed allocating my 2014 ROTH IRA funds with a purchase of 14 shares of Costco Wholesale Corp, (NASDAQ: COST). I am officially a COST shareholder. COST is a stock that I almost bought at the beginning of 2014 but at that time I thought their stock was overpriced. I was wrong. 2014 was a fantastic year for Costco. The company saw its stock rise from $106 to $151 per share. Today, COST stock is trading at $151.26.
My confession – My wife really wanted me to buy Costco last year and I did not listen to her. She really wants me to buy Costco stock this year. I am not making the same mistake. I am buying Costco purely from a happy wife, happy life standpoint. COST is overvalued in my opinion but I am still willing to gamble on their stock at today’s prices. Even if this purchase is a loss in my portfolio, it is a win at home; home happiness is more important. Do not get me wrong, I am a huge fan of Costco. Honestly this is my favorite store. I believe the entire operation is sound, from the greeter at the door to the CEO, Costco is a well run company.
I often joke with friends that I will never be able to retire because of my wife’s Costco habit. She runs to Costco for cheap milk and returns home with $500 worth of things I did not know I needed. I bought 14 shares at $150.20 per share, totaling $2,111.88. This purchase adds $19.60 to my annual dividend income. I am excited to add Costcostock to my Investment Hunting portfolio.
An Overview of Costco
Costco is a membership warehouse club. The first store opened in 1976 under the Price Club name. Initially, it only catered to small businesses. In the 1980’s the company changed their target customer to include paid memberships to non-business owners. This transformational shift gave rise to the warehouse club. It became the first publicly traded company to grow from zero to $3 billion in sales in less than six-years. COST and Price Club merged in 1993; a few years after the merger in 1997 Price Club, Costco, Price-Costco or whatever it used to be called became known as Costco Wholesale Corp. Today COST has over 671 warehouses with 474 in the United States. International locations include Canada (88), UK (26),Mexico (34), Japan (20),Korea (11), Taiwan (10), Australia (7) and Spain (1).
75% of COST operating income comes in the form of membership fees. At the end of FY2014, COST had 76.4 million membership cardholders. The retention rate for cardholders is outstanding with a 94.5% renewal rate in 2014. Membership fees are Costco’s bread and butter. COST membership is the differentiator between COST and its competition. The ability to generate massive amounts of revenue primarily through subscriptions affords COST the means to become best in class.
Why I Am Buying Costco
Because my wife is making me do it. Just kidding. I am a fan of Costco. I have always wanted to own COST stock but have avoided it because the dividend yield of 0.96% is lower than I look for in an investment. I have also avoided this stock because it never seems to go on sale. I’ve come to the conclusion that if I want to own COST stock it comes at a premium.
Costco Dividend Growth Rate And Yield
- 3-Year Dividend Growth Rate of 14.3%
- 5-Year Dividend Growth Rate of 14.4%
- 10-Year Dividend Growth Rate of 20.9%
- Annual Dividend Yield of 0.96%
- Annual Dividend Per Share Rate of $6.42 (this is abnormally high due to a special payout in 2014)
- 5-Year Dividend Per Share Average of $2.44
- 5-Year Dividend Yield Average of 2.40% (this is high because of a few special payouts)
How Much Is The Stock Worth
Costco’s current P/E Ratio is 30.62, which is well above the S&P average of 18.85, and above the Consumer Staples average of 22.79. As I mentioned, owning COST comes at a premium. Even at the current stock price of 151.26, I still think there is room for share appreciation in 2015.
Analysts are split on the COST share price in 2015.
Argus ranks COST as a buy with a price target of $155.
Morningstar ranks COST a 2-star hold with a price target of $135.
S&P Capital IQ ranks COST as a buy at 4-stars with a price target of $156.
If analysts are to be believed COST may see a a slight price upside this year. I must note that every analyst except for my wife ranks the stock as overvalued as of March 5th 2015.
Earnings Per Share and Sales Growth
- 1-year EPS Growth of 3.68%
- 5-year EPS Growth of 13.51%
- 1-Year Sales Growth of 7.54%
- 5-Year Sales Growth of 9.54%
Forecasted Earnings Per Share
- 1-Year EPS Growth Forecast of 10.94
- 5-Year EPS Growth Forecast of 9.18
Other Key Metrics
- Dividend Payout Ratio (TTM) – 28.32%
- Gross Profit Margin – 12.64%
- Operating Profit Margin – 2.90%
- Net Profit Margin – 1.89%
- Cash Flow Per Share (TTM) – $7.26
All investing comes with risk. Costco faces two risks that I see as potentially hurting their bottom line.
Risk 1 – Membership growth. The U.S. market for new memberships is becoming saturated and new U.S. membership growth may not be sustainable in coming years. This could lead to flat U.S. growth in the future.
Risk 2 – Internationalization. Can COST become a brand leader in other countries? The company has been successful in generating revenue above expenses in Canada, Korea, Taiwan, Australia and the UK. Hopefully the Costco internationalization model continues to succeed. Internationalization could be the new membership growth stream for Costco.
Costco is a well managed company that consistently increases revenue. COST has amazing brand loyalty to its stores and its Kirkland brand of products. I admire Costco and have no concerns about the longevity of this company. COST pays a low dividend yield, however management has increased dividends more than 5 years in a row. I do not see a reason why dividends would not continue to rise especially considering Costco’s low payout ratio of 28.32%. There is plenty of room for future dividend growth and enough cash on hand to cover dividend when revenues dip. I intend to buy and hold Costco stock.
What is you opinion of COST? Do you think COST is overvalued?
Full Disclosure: Long COST