Personal Finance

Why Costco Rallied Today

costco shopping warehouse wholesale

costco shopping warehouse wholesale

Shares of Costco Wholesale (NASDAQ: COST) were rallying today, up 3.1% as of 1:38 p.m. ET.

At the end of last week, the discount retailer reported strong earnings and announced a special dividend to be paid out in January.

Investors and analysts continue to be impressed with the numbers, as a prominent Wall Street analyst raised his price target on shares today.

TD Cowen raises to $700

Today, analysts at TD Cowen raised their price target on Costco from $680 to $700, while maintaining their overweight rating on the stock. While some investors may balk at Costco’s high valuation around 46 times earnings, the analysts at TD Cowen believe Costco can continue to grow via both new stores and increased traffic. Even though inflation has come down a lot, Costco was still able to grow comps through volume, increased membership, and traffic in the first fiscal quarter.

Today’s note follows other upgrades last week, and for good reason. In the 12 weeks ended Nov. 20, revenue grew a healthy 6.2%, in line with estimates, while earnings per share grew 17% to $3.58, beating expectations for $3.42. Comparable store sales, which show how much growth occurred at existing stores relative to one year ago, were also solid, up 3.9% on an adjusted basis.

Basically, Costco continues to chug along, steadily growing in spite of higher interest rates biting into consumer spending.

In addition, Costco announced a special dividend of $15 that will be paid out in January to shareholders of record as of Dec. 28. That means the company’s ex-dividend date is Dec. 27. So shareholders looking at getting in on that dividend need to own the stock before Tuesday, Dec. 26. That upcoming Christmas present to shareholders could also explain some of the buying in the stock today.

Costco pays a small dividend, but has historically paid special dividends about once every three years. This $15 special payout will be its largest ever, compared with the $7, $5, $7, and $10 special dividends paid out in 2012, 2015, 2017, and 2020, respectively. The $15 dividend amounts to roughly an extra 2.2% yield at today’s price on top of Costco’s regular 0.6% dividend.

Costco may be the best retailer on the planet, but is priced accordingly

At 46 times earnings, it’s a little hard to say Costco stock is a screaming buy here, even when factoring in the upcoming special dividend.

That said, over the long run, Costco is likely to do well for its shareholders. That will be especially true, I think, if it continues to find success in China. The company only entered China recently, and has just five warehouses there, with plans to open up a sixth in the upcoming year. That compares with 600 warehouses in the U.S. and Puerto Rico and 871 overall.

Given China’s massive size and affinity for the discount brand, Costco’s China opportunity could very well justify this type of valuation.

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Billy Duberstein has positions in Costco Wholesale. 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.

Why Costco Rallied Today was originally published by The Motley Fool

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