Costco Wholesale Corporation (NASDAQ: COST) operates an international chain of membership warehouses, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. As of 2010 Costco operated 582 warehouses in the US, Canada, Puerto Rico, UK, Taiwan, Korea, Japan, Australia, and Mexico. They also operate a website, Costco.com.
*Note: Costco’s fiscal year ends in August. So Fy 2010 ended in August, 2010. All calculations in this analysis are based on the latest annual report, released August 2010, except for expected eps and current dividend yield.
EPS, Dividends, FCF
|Annual Growth Rates||Earnings Per Share||Dividends Per Share||FCF Per Share|
COST paid it’s first dividend in 2004, and has increased it’s dividend every year since, though at a faster pace than earnings. Free cash flow was at a loss in 2001 and 2002, stayed relatively stagnant for a few years, then jumped in 2010 by almost $2 per share.
- FY 2011 – 3.33
- FY 2012 – 3.81
Analysts expect Costco to grow earnings at an average rate of 12.8% for the next 5 years, while the industry average is 14.7%.
Payout ratios leave plenty of room for dividend growth, only being 26% of earnings and 19.8% of fcf as of 2010.
Revenue and Margins
|Years||Revenue (in millions)|
Revenue has grown by an average of 9.28% for the past 10 years
All margins have remained stable, but are lower than industry peers. This is to be expected for a business model that basically sells goods at cost.
Costco’s balance sheet is very clean. Debt is only 16.55% of their capital structure.
The interest coverage ratio is a whopping 18.71, and the current ratio is 1.16
Return on equity for the past year was 12.39%, which is average for COST. Cash Return on Total Capital last year was 13.17%
Stock Price Valuations
current price –70.65
5 year low p/e –17.05
p/e (ttm) –24.20
p/e (forward) –21.22
p/cash flow –18.23
5 year high dividend yield –1.44%
dividend yield –1.16%
If you have ever shopped at a membership warehouse like Costco, you know how easy it is to get hooked. The place is enormous, and offers you larger quantities of goods than you ever imagined you could buy at once. What’s that, you need a gallon of mayonnaise? Check. A 100 pack of paper towels? Check. And while your there, you can also grab a computer, a bbq, and get your photos printed while you shop.
In addition to the super-deals you get, you can only shop there if you buy a membership, and buying a membership pretty much guarantees repeat customers.
I like Costco. It’s got international exposure, a great business model, and it’s profitable. Margins are a little low, even for this industry, but their balance sheet is super-clean, and they have plenty of debt coverage. The dividend history is a little short, but Costco is a relatively young company, and the fact that they continued to grow their dividend, even during the recession, shows management’s commitment to shareholder return. I do think it’s a bit pricey at the moment, and would like to see the price come down before I consider buying.
For comparison, see my analysis of other discount retailers Target and Walmart
To get all my updates, please subscribe to my rss feed
Full Disclosure: I do not own any COST. My Current Portfolio Holdings can be seen here
Nice analysis DP! I like the fact that their revenue’s been growing even during the turbulent times of the lost decade (except 2009, but then not by a big margin compared to previous year).
Absolutely. Add to that an increasing dividend, and you have a company that is financially strong and looking for long-term investors. A great combination!