Costco Is Paying Out $13 Billion in Special Dividends This Year. Is the Stock a Buy?
Key Points
Costco's $30 special dividend is its largest yet, and the sixth since 2012.
October sales and traffic grew strongly even as shoppers worry about high prices.
At roughly 51 times earnings with about 10% expected growth, the stock looks like a hold, not a buy.
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Costco Wholesale (NASDAQ:COST) just declared a $30-per-share special dividend. That's a total of $13.3 billion going to shareholders, payable on Dec. 4. The stock's forward dividend yield, based on its regular quarterly payment of $1.47, is 0.55%. The special dividend is 2.8% of the Nov. 10 closing share price.
Costco doesn't pay these on a fixed schedule. This is its sixth special dividend since 2012, and the first since a $15 payout in January 2024. At twice that amount, it's the largest yet. These special dividends reflect a cash machine, as customers continue flocking to Costco stores, paying their annual membership fees, and taking advantage of deals.
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But investors have bid the stock up to an expensive-looking valuation. The question is whether the special dividend is worth the premium.
Image source: Getty Images.
One reason the stock is worth holding is that Costco is benefiting from the inflationary environment.
Households are stretched: 56% of consumers in the University of Michigan's October survey said high prices are impacting their finances. Yet Costco's comparable sales rose 7.3% in October, excluding gas prices and currency swings. Shopper traffic climbed 4.1% worldwide, and online sales jumped 22.5%. Tighter spending budgets are clearly driving more visits to Costco.
At the Nov. 10 close of $1,066.14, Costco’s shares trade at about 51 times trailing earnings and 47 times fiscal 2027 estimates. That compares with five- and 10-year average P/E ratios of 47 and 40.
That's expensive, considering analysts expect Costco's earnings per share to grow about 10.6% a year. By comparison, the S&P 500 trades at a forward P/E of about 19, with analysts expecting earnings to grow 16% in 2027.
So is Costco a buy? I'm not buying it at this price. The business is strong enough to fund special dividends every few years in addition to its regular quarterly dividends, so it's worth holding for existing shareholders. But I'm waiting for a lower valuation before buying.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
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