Dividend Stock Analysis

Costco Dividend Stock Analysis

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Company Overview

Costco Logo 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

eps graph

Annual Growth RatesEarnings Per ShareDividends Per ShareFCF Per Share
10 year9.4%N/AN/A
5 year6.15%11.96%31.94%
1 year18.22%%13.24%102.57%%

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.

Expected Earnings

  • 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 ratio graph

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

YearsRevenue (in millions)

Revenue has grown by an average of 9.28% for the past 10 years

margins graph

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.

Balance Sheet

debt graph

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


returns line graph

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
peg –1.89
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

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Full Disclosure: I do not own any COST. My Current Portfolio Holdings can be seen here

I'm a dividend growth investor who is aiming to retire early in 5 years at the age of 45. My goal is to live off the income my dividend portfolio and rental property produce exclusively and leave the corporate rat race. I hope you will join me in this journey!


  1. 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!