Over the years Costco Wholesale (NASDAQ: COST) investors have become accustomed to collecting special dividends when the company has a strong year. However, special dividend payments offer even less guarantee than regular dividend payments because they do not follow a schedule. Just because a company makes them once doesn’t mean it will happen again.
But Costco has made special dividend payments several times in recent years. And last year that announcement came in December. Should investors expect another special dividend payout from Costco this year?
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Last year, Costco announced a special dividend of $15 per share to coincide with the release of its first quarter results. Before that, it paid a special dividend of $10 per share in 2020, a few years after paying a special dividend of $7 per share in 2017. The company also made special dividend payments in 2015 ($5) and 2012 ($7). ).
While Costco has made many of these types of payments in the past, it still hasn’t done so in recent years. But with special dividend payments, investors shouldn’t rely strictly on patterns, as they are likely due more to pure earnings growth than anything else.
Costco may feel compelled to reward its investors with special dividends. Otherwise, it might seem like a disappointing dividend stock to own, given its modest 0.5% yield. That’s well shy of the S&P500 on average more than 1.2%.
Costco has been a growth machine over the years and that has allowed the company to offer such high rates for special dividend payments. The payout ratio is a relatively modest 26% of profits.
While the company could justify a large increase in recurring quarterly dividend payments, Costco appears to prefer one-time special dividend payments. These can give the company much more flexibility and result in less pressure by not creating an expectation of higher recurring payments, which could drain its cash and limit its growth opportunities.
With growth still tepid and economic conditions potentially more challenging, it may be difficult for Costco to justify another special dividend payment in December, especially since the company already made one last year. Ultimately, that’s why I didn’t expect this to happen. The company is not having a banner year to justify making the exception.
