This Retail Stock Just Got Interesting for Income Investors

For growth, value and especially income investors, there is much to like about Costco’s (NASDAQ: COST) recent announcement that it is increasing its quarterly dividend to 40 cents a share and instituting a new $4 billion stock buyback program.
The announcement of the 12.7% dividend increase and stock buyback lifted the share price for the big-box retail stock 1.74% in early market trading Monday.
Costco’s revenue growth is up 4.4% for the last year. That tops the industry average by 0.5%. Earnings per share growth is projected to rise by 10.40% over the next five years, based on the consensus of the analyst community. That’s more than twice the projected EPS growth for big-box rival Wal-Mart (NYSE: WMT).
Along with the earnings growth and the income boost, there are many reasons for value investors to be bullish about Costco. Shares currently trade at a price-to-sales ratio of 0.55. That means that every dollar of sales is valued at just 55 cents in the price of the stock.
This P/S discount is very alluring when contrasted with other stocks in the retail sector. By comparison, the P/S ratio for Target (NYSE: TGT), another big-box competitor, is 0.71. For Dollar General (NYSE: DG), a deep discount chain, the P/S ratio is 1.2. It is 0.85 for Family Dollar Stores (NYSE: FDO), another deep discounter.
For income investors, the mother ship appears to be landing for Costco. Currently, the dividend yield is just under 1%. It would just about have to double from that point to be at the S&P 500 average. This room for dividend growth is what makes Costco so appealing for long-term income investors.
The chart below shows how much stronger Costco is than Target and Wal-Mart when it comes to funding dividend increases for the future, especially in cash available:

Source: Finviz; *Target had negative earnings per share growth this year, so the basis for future increases is much lower.

Costco’s membership fee and product line also protects it from the damage that has been inflicted on Wal-Mart and Target by deep discount retailers like Dollar General and Family Dollar. Costco members are typically wealthier than Wal-Mart customers, which mitigates the competition from the deep discounters.
Costco membership revenues have steadily risen, and there is every reason to expect that growth to continue. That is a major reason for income investors to look for Costco to increase the amount of its dividend in the future.
Jonathan Yates does not have a position in any of the stocks mentioned in this article.

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