3 Reasons to Buy Costco Stock Like There's No Tomorrow

Source The Motley Fool

Everybody loves Costco Wholesale (NASDAQ: COST). Customers love the prices. Employees love the above-average pay and perks, explaining why turnover clocks in at a mere 8% annually. Employee turnover for retailers in general runs closer to 60%. Even investors love Costco, despite the stock's seemingly lofty valuation.

I'll address the valuation sticking point shortly, as it's actually one of the three reasons to buy shares of the warehouse club operator like there's no tomorrow.

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1. Always bet on winners

Pick a starting line, and odds are investors have fared well buying into the country's leading membership-based shopping experience. Costco stock is up 6% so far during this volatile year. It's a welcome contrast to the S&P 500's 10% year-to-date slide. Let's zoom out. Costco is up 35% over the past year, 71% over three years, and 239% over five years. Go all the way back to the original starting line, and Costco is a whopping 383-bagger since going public 32 years ago.

Bears will argue that the valuation is stiff, and that's a fair shot. Costco is trading for more than 50 times trailing earnings, a sky-high sum for most investments. Its revenue multiple of 1.6 may seem reasonable, but that's steep in the sleepy low-margin realm of groceries and other non-discretionary retail.

The stock is not cheap on paper. When Mizuho analyst David Bellinger initiated coverage of Costco last week, he went with a neutral rating. He gushes about the company's strong fundamentals and insulation from the tariffs malaise. With enemies like these, who needs friends? He ultimately feels the shares are fairly valued, but that's the point. There's not much of a bearish argument beyond the price, but the same thesis was the case for those lukewarm about the stock a year, three years, and five years ago. Costco just keeps winning.

A shopper going over merchandise at a warehouse club.

Image source: Getty Images.

2. It's more than a dividend hike

Costco stock opened higher on Thursday after the company announced a higher payout. The boost isn't a surprise. It stretches its streaks of annual hikes to a juicy 20 years. Raising its quarterly distributions from $1.16 to $1.30 per share may seem like a lot, but the annualized rate of $5.20 doesn't amount to much when a stock is approaching a price tag of $1,000. It's a meager yield just above 0.5%.

The warehouse club leader does announce one-time special dividends every few years. The last time that Costco did this was in late 2023, with a record $15-per-share disbursement. It does add another 1.5% yield at today's price tag, but that's not a regular event. There aren't a lot of people buying Costco primarily for the payouts.

The point here is that this is more about the timing of the announcement than the act itself. Costco has the wiggle room to go higher. With a payout ratio just above 25%, this week's hike brings the dividend to just a quarter of what it's actually earning. However, declaring it now -- ahead of an earnings season that will likely see few consumer retail chains following suit -- is telling. Costco has a rosier near-term outlook for its business than most chains. The hike is just a welcome flex at a time when most retailers will be tighter with their money as they size up the landscape with their fogged-up goggles.

3. The business is built for every new normal

Earlier this month Costco announced same-store sales for the five weeks ending April 6. The comps climbed 6.4%, up an even better 7.5% for its U.S. stores. With consumer confidence sliding in the last few months and recessionary chatter starting to build, you're not going to find a lot of retailers delivering that kind of store-level growth. It gets better. Back out the gas pumps outside the stores, and U.S. comps rose an even heartier 8.7% for the period.

It's easy to see why customers will continue to shop at Costco in a souring economy. It's had just one year of negative sales -- a modest 1.5% top-line decline in fiscal 2009 -- in its more than three decades of public trading. Costco's business model is based on modest markups. Even its decision to increase membership fees by $5 to $10 in September -- half of what many were expecting -- is a testament to how it's looking out for its customers. Its 2.9% in trailing net margin is barely more than the 2% of revenue it collects in membership dues. Instead of stretching its pricing elasticity for near-term gains, Costco is expanding its customer loyalty for long-term gains. It's the right call. Check the stock chart if you think otherwise.

Costco isn't perfect. It's just the right stock at the right time. As fate would have it, that pretty much always seems to be the case here with the class act of retail.

Should you invest $1,000 in Costco Wholesale right now?

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Rick Munarriz has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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