Costco Wholesale (COST -7.64%) is a reliable stock for gains and dividends. However, despite sales starting to sag this year, the price keeps climbing. Costco stock is up 22% in 2023, and it trades at a price-to-earnings ratio of 41. That's above its one-, three-, and five-year averages.
However, I would still recommend buying Costco stock, even at this price. I'll tell you why.
Things are heading back in the right direction
Pre-pandemic, Costco reported mid-to-high single-digit comparable-store (or comps) growth on average for many years. That kind of reliable growth, along with increasing profitability, gained legions of investing fans.
Growth accelerated throughout the first two years of the pandemic, reaching higher than 20% at its height. It was inevitable that it would be followed by a drop. But after hitting negative comps earlier this year, growth is now swinging back up.
| Metric | Q1 23 | Q2 23 | Q3 23 | June | July | August |
|---|
| Sales growth | 8.1% | 6.5% | 1.9% | 4.6% | 4.5% | 5% |
| Comps growth | 6.6% | 5.2% | 0.3% | (1.4)% | 2.5% | 3.4% |
Data source: Costco quarterly and monthly reports. All growth is year over year. Fiscal 2023 starts Aug. 29, 2022.
Since sales are already increasing, when facing these comps in the coming quarters, year-over-year comparisons should be even stronger.
Good things are coming down the pipeline
Costco operates a membership model and enjoys fee income that goes straight to the bottom line. It marks up product prices with tiny margins, leading to robust consumer engagement, especially during difficult times.
For example, even though growth rates have been pressured, traffic is rising, increasing 4.8% over last year in the 2023 fiscal third quarter (ended May 7). The lower revenue numbers are coming from people switching away from expensive purchases, but they're doubling down on their reliance on Costco for the best prices.
This is why it's important to look further than just one metric and dig into some of the underlying behaviors to see the real picture. This also leads to strong card renewal rates and increasing membership. Costco is maintaining all-time high renewal rates of 92.5% in the U.S. and Canada and 90.5% worldwide. Card members increased by 7% over last year in the third quarter.
Management has been discussing the timing of a membership fee increase sometime in the near future. It's already around the average time when it previously increased the fee, which could add millions to the bottom line without impacting member rates. Given Costco's strong performance despite inflation, and since management knows customers are struggling right now, it's waiting on the fee hike.
Something else to look forward to is the special dividend. Costco pays a dividend, but the regular dividend isn't especially attractive, yielding 0.69% at the current price. However, the company has paid a special dividend four times over the past 11 years of $5 to $10 each time. It's about that time again in terms of historical averages, and management said it's likely to pay another one when it feels the time is right. In terms of cash, it's in an excellent position to share the wealth with shareholders, and that may be happening sometime soon.
COST Cash and Equivalents (Quarterly) data by YCharts.
It's not as expensive as you think
Many people would agree with everything I've said and still not want to buy Costco right now because it appears to be expensive.However, that's partially offset by Costco's excellent and growing business. Since you can't time the market, a valuation that's high but not astronomical shouldn't necessarily hold you back if you are holding with a long-term horizon.
But it's more than that because the price-to-earnings ratio right now includes a quarter with lower net income, an unusual case for Costco, due to a one-time charge. If you would back that out, the valuation wouldn't be this high. And when you value the stock with its forward price-to-earnings ratio, the valuation is below average.
COST P/E Ratio (Forward 1y) data by YCharts.
Now is a great time to buy Costco stock before performance improves in the coming quarters.
Jennifer Saibil 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.
FAQs
There are currently 72 million membership households that raked in $4.6 billion of fee revenue last fiscal year. With a worldwide renewal rate of over 90%, this is a sticky customer base. As a consumer favorite, Costco has been able to post solid sales growth, even during macro and pandemic disruptions.
Is Costco a good stock to buy 2024? ›
Costco Wholesale (NASDAQ: COST) stock has been reaching new highs in 2024, but it could have more room to run.
Is Costco over or undervalued? ›
Key Points. Stock valuations can be subjective, but shares of Costco appear to be objectively overvalued. The retail giant has a great business model that has delighted both customers and shareholders. But BJ's Wholesale Club offers investors the same model -- and at a more reasonable valuation.
What will Costco stock be worth in 5 years? ›
According to the latest long-term forecast, Costco price will hit $800 by the end of 2024 and then $900 by the middle of 2025. Costco will rise to $1000 within the year of 2026, $1100 in 2027, $1300 in 2028, $1500 in 2029, $1600 in 2030, $1700 in 2031, $1800 in 2032 and $2000 in 2035.
Is Costco stock a good long term investment? ›
Costco could be a good long-term buy -- but at its current multiple, investors are paying for a lot of future earnings growth. If you want to hang on to it for decades, then it could still be a good investment for you.
Is Costco a good long term stock? ›
On a historic basis, Costco has generated cash flow growth of 14.1%, and is expected to report cash flow expansion of 10.4% this year. Investors should take the time to consider COST for their portfolios due to its solid Zacks Rank rating, notable growth metrics, and impressive Growth and VGM Style Scores.
What stock will boom in 2024? ›
2024's 10 Best-Performing Stocks
| Stock | 2024 return through March 31 |
|---|
| MicroStrategy Inc. (MSTR) | 169.9% |
| SoundHound AI Inc. (SOUN) | 177.8% |
| Vera Therapeutics Inc. (VERA) | 180.4% |
| Avidity Biosciences Inc. (RNA) | 182% |
6 more rowsApr 1, 2024
But I believe that Costco's P/E ratio could actually contract because of how expensive it is right now, and this creates downside risk for investors. Don't expect the $1,000 mark to be met in 2024. And for investors who are drawn to the business, it's best to practice patience and wait for a better valuation.
Does Costco have a future? ›
Of course, Costco is going to have a much larger number of stores in the future. In the last 10 years, the store count expanded at a compound annual rate of 3%. Management opened 23 net new locations in fiscal 2023, with plans to open 31 in the current fiscal year.
Should I invest in Costco or Walmart? ›
While Costco appears to have the best growth prospects, that isn't enough to make it the best investment. Walmart trades at a lower valuation, and its higher dividend yield means you will receive more in dividend payments than you would on the same amount of money invested in Costco. That makes Walmart the winner.
Costco could be a good long-term buy -- but at its current multiple, investors are paying for a lot of future earnings growth. If you want to hang on to it for decades, then it could still be a good investment for you.
Is Costco a better stock than the spy? ›
While Costco has far outperformed the S&P 500 over the past 30 years by a margin of over 30x, it appears overvalued by 4.1% using a discounted cash flow forecast analysis. For that reason, the S&P 500 is likely the better bet for investors over the short-to-medium term.
What is the prediction for Costco stock? ›
Costco Stock Forecast
The 26 analysts with 12-month price forecasts for Costco stock have an average target of 720.04, with a low estimate of 585 and a high estimate of 870. The average target predicts a decrease of -0.37% from the current stock price of 722.68.
Is Costco stock splitting? ›
Costco: Playing by its own rules
It split its stock four times from 1990 through 2000 but hasn't since -- and that's despite gaining more than 1,300% since then.
What is the highest Costco stock has ever been? ›
Historical daily share price chart and data for Costco since 1986 adjusted for splits and dividends. The latest closing stock price for Costco as of April 22, 2024 is 715.46. The all-time high Costco stock closing price was 785.59 on March 07, 2024.
Is Costco a good investment right now? ›
Costco has 9.91% upside potential, based on the analysts' average price target. Costco has a conensus rating of Strong Buy which is based on 19 buy ratings, 6 hold ratings and 0 sell ratings. The average price target for Costco is $786.38.
Why is Costco stock going up so fast? ›
One is an increase to its membership price, and the other is continued growth in international markets. The company's earnings still have a lot of room to grow. That's why this is a retail stock that can make for a good investment, provided that you're willing to buy and hold.
Why is Costco so profitable? ›
Costco's financial success has been driven by its membership model. Memberships drive customer loyalty while producing high-margin revenue. Costco's stock has been a huge winner, and its valuation is excessive.
Is Costco a stable stock? ›
NASDAQ: COST
Costco's growth rate rarely disappoints, and its earnings are much more stable than its peers thanks to a steady stream of subscription fee income. Those competitive assets have been enough to allow the stock to roughly triple the wider market's gains over the last several years.
