Top Dividend Growth Stock — #4 Costco

Have you ever driven by a Costco in the evening or on a weekend? Parking lot is packed, there’s a line of cars buying gas, and jammed checkout lanes. Anecdotally it’s popular. Quantitatively it’s successful — a total return over the past five years of 21.8% per year! Costco (COST) comes in at a glorious #4 in our “Top 20 Dividend Growth Stocks” countdown.

Costco operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. Offering branded and private-label products in a wide group of categories, it also operates pharmacies, optical dispensing centers, food courts, 615 gas stations through over 796 warehouses and through e-commerce websites. Founded in 1976 and is based in Issaquah, Washington.

Costco Wholesale Corp (COST) is Fully Certified, passing ALL Dividend System criteria. It has ‘Premier’ status being in the upper percentiles of this month’s stock universe. The company increased dividends for 16 years, making it a Dividend Contender 10+. We consider COST to be a Growth stock.

GROWTH:  COST’s 5-year average dividend growth rate is 12.5%, slightly below the dividend universe average of 12.4%. Free cash flow has grown at an average rate of 34.4% per year for the last 5 years versus the dividend universe at 8.3%, so COST is performing very well.

INCOME: COST’s current dividend yield is .79%, less than half of the average at 2.65%. 

SAFETY: We use the Dividend Coverage Ratio to measure the dividend’s safety – higher is better. COST has a DCR of 7.6 which is excellent, well above the minimum of 2. 

VALUATION: The price at time of analysis was $355.17, which we consider Overpriced. A fair price based on historical PE ratio and earnings would be around $265.61. The S&P500’s average PE ratio is 38.42, versus COST’s PE ratio of 36.49,  below the S&P 500 average PE, indicating some value, as compared to our dividend universe. Our ‘Value Rating’ for Costco Wholesale Corp is 3 out of 5.0, meaning that  both PS and PE are indicating fair value, compared to other dividend stocks available.

TIMING: Historical Yield and PE tell us that COST has ‘No ‘buy’ signal.’ Don’t eliminate a stock based on one factor (or lack thereof). 

QUALITY: Our quality formula gives COST a ‘Quality Rating’ of 4.1 (out of 5), versus the average of 2.7 for this month’s dividend universe.

TOTAL RETURN: Over the last 15 years, the compound annual growth rate for an investment in Costco Wholesale Corp was 16.18% per year with dividends reinvested, versus the S&P500 Total Return of around 11% per year for the same time period. As you can see, COST is doing better than the market with dividends reinvested.

Compared to all dividend stocks paying 7 years or more of increasing dividends, we rate Costco Wholesale Corp a ‘A+.’

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