Membership-based wholesaler Costco Wholesale (NASDAQ: COST) said Wednesday it is raising its quarterly dividend. This higher payout adds to a growing history of cash payments to shareholders. The company’s regular dividend goes back twenty years. In addition, Costco occasionally pays significant special dividends, which are paid out to shareholders approximately every three years.
This news of another dividend increase from the retailer reminds us just how shareholder-friendly Costco is.
Here are the key points investors need to know about Costco’s latest dividend increase.
Another double-digit increase
In addition to an announcement on Wednesday that sales for the retail month of March (a five-week period ending April 7) are up 9.4% year over year and same-store sales for the same period are up 7.5%, Costco said that it increases its quarterly figures. dividend up 13.7% year-over-year to $1.16. This brings the company’s annual dividend payments to $4.64, giving the stock a dividend yield of 0.64% as of Wednesday’s closing price.
The pace of this dividend increase is not much different from the company’s 13.3% dividend hike 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 too low when you factor in the special dividends it pays to shareholders from time to time. The membership-based wholesaler even paid a special dividend of $15 per share earlier this year. Previous special dividends included payments of $7 in 2012, $5 in 2015, $7 in 2017 and $10 in 2020.
While there’s no guarantee that Costco will continue paying special dividends, it’s fair to say that it is very likely. This is because the company’s annual free cash flow (the cash flow left over after both regular operations and capital expenditures have been handled) is significantly greater than the cash going out the door in quarterly dividends. For example, Costco’s trailing-twelve-month free cash flow was $6.2 billion, while its cash payout in quarterly dividends was $2.2 billion. Such strong free cash flows and modest dividend payments allow cash flows to accumulate over time, prompting management to pay special dividends every few years.
Expect even more growth in the coming years
Looking ahead, there are several reasons why Costco will likely continue to reward shareholders with annual dividend increases.
The first is that the company is still growing its business at a robust pace, as evidenced by its 9.4% revenue growth for the five-week period ending April 7. Second, Costco pays out less than a third of its annual profits in dividends. There remains plenty of room for further growth, even if sales do not continue to grow at the current pace. Finally, the company has an impeccable balance sheet, with total cash and short-term investments of $10.3 billion, which significantly exceeds its long-term debt of $5.9 billion.
Unfortunately for investors who don’t already own the stock, Costco’s stock is valued at an expensive price. Shares trade at more than 47 times earnings. Investors therefore have to pay a pretty penny to get their hands on a piece of these growth stocks. For this reason, investors looking to take advantage of Costco’s dividend may want to wait to see if they can get a better price before buying 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 holds 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
