Costco Stock: No Special Dividend, High Valuation

Costco (COST) stock has risen by 47.5% on a year-to-date basis. Costco’s remarkable comparable sales (or comps growth) supported its upside. However, the surge in Costco stock drove its valuation higher. While we expect Costco to continue beating its peers with its comps growth rate, its stretched valuation is a concern and could limit its upside.

Costco stock trades at a high valuation

Costco stock has mostly traded at a higher valuation than its peers, and its high growth rate has overshadowed any valuation concerns. However, Costco’s valuation gap with its peers and an expected deceleration in its growth rate makes its high valuation unattractive.

COST stock trades at 34.9x its fiscal 2020 estimated EPS of $8.61, which looks expensive based on its projected growth rate of about 5% during that period. Moreover, Costco stock trades at a significantly higher multiple than both Target (TGT) and Walmart (WMT) stock. Walmart stock trades at a forward PE multiple of 23.4x and is up 27.9% year-to-date. Target stock trades at a forward PE multiple of 18.9x and is up 91.3% on a YTD basis.

No special dividend on the horizon

Costco’s phenomenal financial performance and higher cash balance led to the speculation that it could announce a special dividend. Costco had cash and cash equivalents of $8.38 billion at the end of fiscal 2019. Moreover, the company generated free cash flow of $3.36 billion.

However, Costco hasn’t announced a special dividend yet. During the company’s conference call for Q4 of fiscal 2019, Costco’s management stated that it had no specific plans for a special dividend at this time. In May 2017, Costco paid a special dividend of $7.

With no special dividend and high valuation, investors might be able to take a profit in Costco stock. In our view, any pullback in Costco stock could well be an opportunity to go long.

Costco stock: What do analysts expect?

Analysts’ consensus target price on Costco stock implies minimal upside. Analysts have an average target price of $303.91 on COST stock. This target price suggests a slim upside of 1.1% based on its closing price of $300.57 on November 20.

Fifteen of the 28 analysts covering the stock recommend a “buy.” Plus, 12 analysts suggest a “hold,” and one analyst has a “sell” rating.

Analysts expect Costco’s revenues to continue growing at a healthy rate. Its comps growth rate accelerated in October, with robust performance in its domestic business. Analysts project about 7% growth in Costco’s top line in fiscal 2020. Moreover, Costco’s comps growth could be higher than Target and Walmart.

In our view, Costco’s value gap with its peers, high membership renewal rates, and expanded offerings could drive its comps in the coming quarters.

Higher sales and cost savings are likely to support Costco’s earnings. However, the retail giant faces tough comps in the coming quarters, which could limit its EPS growth. Analysts expect Costco’s EPS to mark growth in the high single digits in fiscal 2020. Notably, Costco’s bottom line has increased at a double-digit rate in the last two fiscal years.