The Odds Are High Costco Will Declare a Special Dividend Soon

Key Points

• Costco's share price pulled back following Q4 results, presenting an opportunity in a segment leader. 
• The company is building a cash hoard to be proud of and may issue a special dividend soon. 
• Analysts are raising their targets and should help the market rebound, the only question is when it will begin. 

Costco’s NYSE: COST Q4 results failed to spark a rally, but investors should be cheering the news and the market action. The news confirms that Costco and membership clubs are a bastion of strength in the consumer world and will continue to provide investors with long-term returns. The takeaway is that Costco’s post-release share price decline is a budding opportunity in a highly-valued stock, and there are more reasons than growth to be interested. 

Trading at over 35X its earnings outlook, it is double the valuation of the average S&P 500 stock and well above any of its peers. It is unlikely the stock will fall significantly from its present levels because of its leadership position and quality, but any chance to load up on lower prices is one investors should take note of. The company could issue another special dividend within the next few quarters. 

Costco Falls On Tepid Results: Special Dividend Coming

Costco had a solid quarter despite some mixed details within the report. The top line of $78.094 billion is up 9.5% compared to last year, including an extra week, beating the consensus estimate by more than 100 basis points. Strength was driven by solid comps offset by weaker fuel sales due to price deflation.

The salient detail about revenue is that relative revenue weakness in the US comp, up 3.1% adjusted, was offset by strength in Canada and Other International markets to drive outperformance yet again. Growth is expected to continue with new store additions, and eCommerce sales continue to be a driving force. eCommerce sales fell 0.6% compared to last year’s record levels and are improving sequentially. In addition, big-ticket item sales are improving and make up more than 50% of the segment. 

The margin news is mixed, with gross margin and SG&A increasing slightly, but increased spending was not enough to offset the top-line strength and gross margin improvement. The results are net income up 15.6% and Q4 GAAP earnings up 15.7% to $4.86, sufficient to sustain operations while improving the balance sheet. 

The takeaway from the balance sheet is the $19.5 billion retained earnings this year and the 35% increase in cash. Cash on hand is roughly $13.7 billion, with some market participants speculating about a special dividend. Costco has issued 4 special dividends over its lifespan; the last was worth $10.00 and could be easily repeated in 2023 or early 2024. As it is, Costco’s 0.75% yield is incredibly safe and expected to grow at a double-digit pace.

Analysts Lead Costco Market Higher; Shares Will Follow

The analysts have steadily raised their price targets for Costco stock over the past several years. The trend in the consensus price has led the market higher during that time and is moving higher following the Q4 results. Marketbeat.com picked up 7 revisions within the first 12 hours of the release, including 5 boosted price targets and 1 reiterated Outperform with a price target that aligns with the broad consensus.

The broad consensus sees this stock fairly valued near current levels, but the average of the 7 new targets is well above that and includes the new high of $652. Their consensus is closer to $600 or about 10% above the post-release action. 

The price action in Costco is trending higher over the long term but has been consolidating over the last year or so. The post-release action has the market down and approaching a potential support level at the 150-day moving average. If the market can hold there, a rebound should follow soon. If not, the market for Costco may fall below the 150-day EMA, where it would provide a better risk-reward profile. The risk is when the next special dividend, if any, is declared.