Why Costco Investors Shouldn’t Give Up

One of the biggest mistakes I made after joining InvestorPlace was to give up on Costco Wholesale (NASDAQ:COST) stock.

I had a nice profit. I could have stayed in. But, fearing the process of demographic change – young people moving into small apartments – I bailed.

Since then, Costco stock is up more than 61%. The dividend has steadily increased, to 79 cents per share. More important, I still go to Costco.

That should have been the “tell,” the fact that stayed my hand. I’ve been a loyal Costco shopper since college. My late father introduced me, with a big grin on his face. To him, Costco represented California. It was American abundance, it was the promised land. Why would you leave the promised land?

The Ultimate Value Stock

Costco is a right of passage for new members of the car driving, suburban middle class. I enjoy going to a Costco in an area with immigrants. I see the same thing in their eyes I saw in my dad’s decades ago. It makes me happy.

Costco is more than the “low-price police.” It’s the personification of American fairness. It treats its employees well. Its profits track closely with its membership fees. It’s closed on Labor Day.

It’s also not in the crosshairs of the anti-trust police. Even with sales approaching $200 billion/year, it’s still just 3% of the U.S. retail landscape. Walmart (NYSE:WMT) is more than twice as big, and its Sam’s Club is serious competition. BJ’s Wholesale (NYSE:BJ), where you can get smaller quantities, is big in the northeast.

Costco continues to grow at 20% per year, at scale. Its net income grows even faster. Inflation, today’s main economic bugaboo, helps Costco. Higher gas prices mean more cash flow. Higher grocery prices drive shoppers to the warehouse. The opening of a new warehouse, and there are four scheduled in October alone, means a new suburb has arrived.

Watch the Dip on COST Stock

At its Sept. 17 price of $462/share, Costco stock is pricey. The market cap of $204 billion exceeds this year’s expected revenue of $186 billion, which is very high for a retailer. (Walmart sells for about three-quarters of its revenue.) Buyers are now paying 43 times earnings, against 37 times earnings for Microsoft (NASDAQ:MSFT). That dividend yields just 0.81%.

Costco stock doesn’t fall, but it does “dip.” It dipped at the start of the pandemic. It dipped again this past May. The dips are usually associated with economic uncertainty.

I expect the next dip to come once inflation starts to abate. The company’s sales growth should slow as supply chains expand. This could lead some to sell Costco shares, trading value for growth.

That’s when you want to get in.

The Bottom Line

For my generation of Americans, Costco is what Walmart was for our parents, and Sears was for our grandparents. It’s the sign of ultimate value.

For my kids’ generation, Amazon.com (NASDAQ:AMZN) may be their Costco. This doesn’t make Costco a bad stock to own. Walmart has doubled over the last five years.

There remain questions. Will Costco evolve as e-commerce becomes commerce, as cities replace suburbs, and as it becomes obvious a lot of baby boomers will never have grandchildren?

The answer may be international. Costco now has more than 200 warehouses outside the U.S. Each one draws 10 times the new memberships in its first months as a U.S. warehouse. That’s where Costco’s is. About 80% renew their memberships.

Costco will be fine.

On the date of publication, Dana Blankenhorn held long positions in AMZN and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.