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In the discount retail industry, two companies reign supreme: Costco (NASDAQ: COST) and Wal-Mart (NYSE: WMT). With a $242 billion market capitalization, Wal-Mart is the biggest retailer in the world and the largest private employer in the United States. Costco is also huge, with a $62 billion market cap.
But even though Costco and Wal-Mart operate similar businesses, they are heading in different directions. Costco continues to thrive thanks to its highly lucrative membership program and better public image, while Wal-Mart increasingly looks like a retailer of the past.
Here is why these two dividend stocks are suited for different investor types.
Costco is in a period of higher growth than Wal-Mart. This played out in both retailers’ respective earnings reports last quarter. Costco grew comparable sales by 6% last quarter excluding foreign exchange effects and lower oil prices, which is excellent growth for a retailer as large as Costco. Earnings per share grew by 9% year-over-year and total revenue grew 1%.
For its part, Wal-Mart’s total revenue declined 0.1% last quarter. Same-store sales growth in the U.S. was just 1.1% last quarter, and earnings per share declined by 7%.
Costco is doing so well because it has a hugely successful membership program built upon loyal customers. Membership fees rose 4% last quarter. Its renewal rate stood at 91% in the United States and Canada, and 88% worldwide.
Wal-Mart has a similar business through its Sam’s Club platform, but its core business, Wal-Mart Supercenters, is struggling. To compensate, it’s turning to two key strategic initiatives – smaller stores and e-commerce.
And, to be sure, Wal-Mart is seeing strong results on both strategies. Its Neighborhood Market stores – which are about 42,000 square feet on average – posted 7.9% growth in comparable-store sales last quarter.
This format is perfectly positioned to capitalize on the millions of urban consumers who live in large cities, where Wal-Mart has struggled to enter. That’s because big cities simply couldn’t offer the square footage necessary to build one of Wal-Mart’s Supercenters.
The second factor working in Wal-Mart’s favor is its e-commerce business. Consumers are increasingly making transactions on mobile devices, and Wal-Mart is determined to not miss out on this booming trend.
E-commerce sales jumped 17% globally last quarter. There’s plenty of room for continued growth here as well, since Wal-Mart operates e-commerce sites in just 11 countries across the globe.
To keep increasing e-commerce sales, Wal-Mart is investing in its online capabilities. In the U.S., the company is rolling out a simplified checkout process on its website. The goal is to deliver a better experience on mobile devices, an increasingly significant driver of its e-commerce business. Wal-Mart is also rolling out a $50-a-year shipping program that will compete with Amazon.com’s (NASDAQ: AMZN) Prime service.
Still, these initiatives will take time to play out. Wal-Mart is a massive company that does approximately $500 billion in annual sales. Its smaller initiatives are very promising, but still represent a modest portion of the total business. Put simply, a ship as big as Wal-Mart can’t turn on a dime.
Which dividend stock is right for you depends on what type of investor you are. Wal-Mart is better suited for investors who need current income now, such as retirees. That’s because of its 2.6% dividend. That might not seem like a huge spread over Costco’s 1.1% dividend, but investors are getting 136% more income for every dollar invested in Wal-Mart versus Costco.
The flip side of the coin is that Costco is a better choice for dividend growth investors who have a longer time horizon. That’s because Costco is growing its distribution at a much higher rate than Wal-Mart. Over the past five years, Costco has increased its dividend by 14% compounded annually. By comparison, Wal-Mart has lifted its payout by 10% per year in the same period.
Moreover, Costco paid a $5 per share special dividend last quarter. For income investors who need payouts sooner rather than later, Wal-Mart is the better pick. But dividend growth investors should ring the register on Costco.
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