The price of Costco Wholesale’s (COST) $1.50 hot dog and soda combo hasn’t budged for decades. Happily, the same can’t be said for the price of COST stock.
Indeed, shares in the nation’s third-largest retailer have outperformed the broader market by wide margins for a very long time.
Costco’s origins trace back to a single warehouse store in 1980s Seattle. The company we know today emerged after a merger with a competitor in the mid-90s. By the early 21st century, Costco’s secret sauce of membership fees, high inventory turnover and Kirkland private-label products was already in place.
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The importance of the membership model is hard to overstate. This recurring source of revenue not only accounts for about two-thirds of Costco’s operating profit, but it also provides a predictable source of cash flow. As such, the company has a financial buffer in the often volatile world of retail sales.
Membership fees also allow Costco to sell its goods at very close to cost. Meanwhile, low prices are a key to customer retention – and they very much work. Membership renewal rates have topped 90% for ages.
Then there’s Costco’s focus on offering far fewer items, or stock keeping units (SKUs), than the typical supermarket. Rather than carrying, say, 30,000 SKUs, Costco has only about 4,000.
A low number of SKUs allows Costco to turn over its inventory quickly. That sort of efficiency – as well as massive sales of private-label products – boosts gross margins.
For example, over the past decade, Costco’s top line has grown at an annual average rate of 10%, but operating earnings have chugged along at more than 12%. That sort of efficiency is typically rewarded by patient investors.
At the same time, COST has been good to the equity-income crowd. The company is one of the best dividend stocks for dependable dividend growth, having raised its payout annually for more than two decades, and at a compound annual growth rate of more than 12%. Costco also likes to splurge on the occasional special dividend or defensive stock buyback.
Today, in an industry increasingly threatened by e-commerce, the company operates more than 900 warehouses worldwide. In addition to the cheap hot dogs and soda, loyalists love the retailer’s value proposition and its “treasure hunt” shopping experience.
In other words, Costco is a warehouse club with a moat.
The bottom line on Costco stock
Costco’s retail formula has generated outstanding returns for buy-and-hold investors. Over its entire life as a publicly traded company, the consumer staples stock has generated an annualized total return (price change plus dividends) of more than 12%. That beats the S&P 500 by about 2 percentage points.
The stock has also outperformed the broader market – and by wide margins – over the past three-, five-, 10- and 15-year periods.
Which brings us to what you’d have if you put $1,000 into Costco stock 20 years ago.
Have a look at the above chart and you’ll see that if you invested $1,000 into COST two decades ago, it would today be worth about $26,000. That’s good for an annualized total return of 17.7%.
The same sum invested in an S&P 500 index fund would be worth about $7,400, or 10.5% annualized.
As for where COST goes from here, Wall Street is fairly bullish on the name. Of the 37 analysts covering Costco surveyed by S&P Global Market Intelligence, 20 rate it at Strong Buy, three say Buy, 12 have it at Hold and one rates it a Strong Sell.
Speaking for the bulls, Oppenheimer analyst Rupesh Parikh cites the company’s “unique and improving” value proposition, “open-ended” global growth potential and consistent track record of shareholder returns.
“Looking forward, we still see the potential for a special dividend and/or a stock split, which could represent positive catalysts for shares,” writes Parikh, who rates COST at Outperform (the equivalent of Buy).