Costco Increases Its Dividend: What You Need to Know

Costco Increases Its Dividend: What You Need to Know

Membership-based wholesale retailer Costco Wholesale (NASDAQ: COST) said on Wednesday it is increasing its quarterly dividend. This increased payout adds to a growing history of cash payments to shareholders. The company’s regular dividend goes back 20 years. In addition, Costco occasionally pays out significant special dividends, which have been dished out to shareholders approximately every three years.

This news of another dividend increase from the retailer is a reminder of how shareholder-friendly Costco is.

Here are the key takeaways investors should know about Costco’s latest dividend hike.

Another double-digit increase

Alongside an announcement on Wednesday about sales for its retail month of March (a five-week period ended April 7) increasing 9.4% year over year and its same-store sales for the same period rising 7.5%, Costco said it is increasing its quarterly dividend by 13.7% year over year to $1.16. This puts the company’s annual dividend payments at $4.64, giving the stock a dividend yield of 0.64% as of its closing price on Wednesday.

The rate of this dividend increase is not too different than the company’s 13.3% dividend increase last year.

This new dividend will be paid to shareholders on May 10.

Building on special dividends

Investors should note that Costco’s dividend yield is understated if you include the special dividends it pays to shareholders from time to time. In fact, the membership-based wholesale retailer paid a special dividend of $15 per share earlier this year. Previous special dividends were payments of $7 in 2012, $5 in 2015, $7 in 2017, and $10 in 2020.

While there’s no guarantee Costco will continue paying special dividends, it’s fair to say it’s highly likely. This is because the company’s annual free cash flow (cash flow left over after both regular operations and capital expenditures are taken care of) significantly exceeds the cash going out the door in quarterly dividends. Costco’s free cash flow over the trailing 12 months, for instance, was $6.2 billion, while cash paid out in quarterly dividends was $2.2 billion. Such strong free cash flow and modest dividend payments mean that cash builds up over time, prompting management to pay out special dividends every few years.

Expect even more growth in the coming years

Looking ahead, there are several reasons Costco will likely continue rewarding shareholders with annual dividend increases.

The first is that the company is still growing its business at robust rates, as evidenced by its 9.4% sales growth for the five-week period ended April 7. Second, Costco is paying out less than a third of its annual earnings in dividends, leaving plenty of room for further growth even if sales don’t continue growing at their current rate. Finally, the company has a pristine balance sheet, with total cash and short-term investments of $10.3 billion, significantly exceeding its long-term debt of $5.9 billion.

Unfortunately for investors who don’t already own the stock, Costco’s stock commands a pricey valuation. Shares trade at more than 47 times earnings. Investors, therefore, have to pay a pretty penny to get a piece of this growth stock. For this reason, investors looking to benefit from Costco’s dividend may want to wait to see if they can get a better price before they buy shares. For current Costco shareholders, on the other hand, it’s time to celebrate.

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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

Costco Increases Its Dividend: What You Need to Know was originally published by The Motley Fool