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Costco Isn't A Good Buy Despite The Upcoming Dividend Raise

Khen Elazar profile picture
Khen Elazar


  • Costco has been growing dividends for 16 years, and the 17th year is coming this month.
  • The company's valuation seems out of touch.
  • In my opinion, at the current valuation the risks are too high.

Special lines for shoppers at Costco during COVID-19 pandemic
Photo by Thomas De Wever/iStock Editorial via Getty Images


I am always looking for more candidates for my dividend growth portfolio. Right now in my dividend growth portfolio, I lack some exposure to REITs and consumer staples. In previous articles, I analyzed

This article was written by

Khen Elazar profile picture

Analyst’s Disclosure: I am/we are long WMT, TGT, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (48)

LookingAtStocks profile picture
From the 5/10/21 Investor's Business Daily...
"When it comes to technical analysis, Costco stock shows overall weakness but an improvement in recent weeks. In the past few weeks, shares have reclaimed both the 50-day and 200-day lines. Costco is nearing the 393.25 buy point of a cup base. Shares remain roughly 3% away from the entry."
jasaggie profile picture
Any company willing to run off good customers in order to force mask-wearing, couldn’t be in my portfolio. And it’s expensive to boot. Makes it seem like they don’t really believe in the vaccine, requiring vaccinated associates and customers to wear a mask, even in states that are “open”. 🤔
@jasaggie At most, mask wearing is a minor inconvenience, but "entitled" people apparently don't give a s**t about anyone but themselves. Long COST
@MoreBacon i am always shocked when people get on a stock forum and talk about masks... am i the only one?
jasaggie profile picture
@MoreBacon if you mean by not wearing a mask, I'm thinking about myself, so be it. if you mean, by taking the vaccine, I'm thinking about myself, so be it. but, if you mean, you like your COST management team running off business, we don't agree. there is a cost to acquire customers as you know.

I am curious, do you believe in the vaccine? even Dr Fauci, who admittedly has been all over the board when it comes to masks, yesterday said the indoor wearing of masks needs to be reviewed in light of the number of vaccinated.

and @Gina1996 the article premise is about COST being overpriced. management plays a role in that. and this is an example of a business policy that makes no common sense.
Costco has a very sticky subscriber business model, with most of their revenue coming from repeating membership fees, so their margins don’t need to be high. They had an Amazon Prime model before Amazon. I’ve owned it close to 15 years and it’s been a great run. No plans to sell.
@KC_Alpha dividend reinvestment!! i am close to 15 .. for sure more than 10. keep it rolling COSTCO!
navigatoris profile picture
Don't understand why anyone would trade COST. Bought in 2004 at 38, then again in 2005 at 53. Never traded it, always re-invested distributions. Remember some analysts considered it overpriced because their margins were too thin. Maybe they should raise the price of their great hot dogs.
@navigatoris "Maybe they should raise the price of their great hot dogs."

Silence your heresy this instant.
ocvegasproperty profile picture
@navigatoris As My uncle Kevin O’Leary would say, “That is their soul along with the 5.99 chicken” which the price hasn’t changed in about a decade. First time I remember buying costco was at 40 and may have been before that...
@navigatoris how many years have we heard.. "costco is expensive" glad i never listened and just kept buying!
Pey Shadzi profile picture
Not sure how you can write an article about Costco without speaking extensively about their current international expansion plans. They just opened their first store in China in 2019. Membership sign ups are through the roof. Costco’s run as a business is just beginning.

The multiple is high, yes, it’s always been but no one has ever been right yet betting against Costco. Buy the stock now and on dips, reinvest the dividend and hold on for life.

I wrote an article on SA in 2012 saying COST was expensive at $80 a share. How naive I was. Don’t make the same mistake.
@Pey Shadzi why did they stop expansion internationally after opening only one store in China? what about expansion in ohter countries. I know they have in UK
Friendorfoe profile picture
@Pey Shadzi Good job of explaining COST to Khen, especially your comment: "I wrote an article on SA in 2012 saying COST was expensive at $80 a share. How naive I was. Don’t make the same mistake." Although I have not gone thru the exercise, I believe if you looked at this stock in 5-year spans over its entire public period, you would find reason to make that same comment at every single 5-year segment. I have tenaciously been holding shares since 1989.
Costco has always been overpriced. But it doesn't go down much, go figure
Great company COST, but overvalued at this time.
Costco and Target are the two overpriced stocks in the sector.
@southbuckeye I agree but at least Costco has membership revenue and loyalty PLUS the Special Dividend.
I agree, but they are the cream of the crop in the retail sector. I own both and will continue to add on dips.
Only thing I don't like about Costco, that we are spending more and more money there as time goes buy.
Yesterday stopped by just for a few things , walked out with around $250 less in my pocket :)
Never underestimate the value of good service. When combined with their low prices (where else can I buy gas that's $0.30 cheaper), I think they are best in class for the retail sector and deserve the premium that is reflected in the stock price. Additionally, the employees seem happier there which makes the whole shopping experience that much more enjoyable. And I haven't even touched on the treasure hunt aspect of their model.
Buyandhold 2012 profile picture
Costco is a buy at $340 or lower and a hold over $340.
....and they turn inventory at a phenomenal rate.
COST, HD, TGT, AMZN. Buy on dips, DRIP, and hold forever. You won’t be sorry.
@formercaddie amzn no drip... but i agree!!! buy and hold these market leaders!
There’s a bunch that’s incorrect or omitted here. You mention Costco’s competition risk: all of those companies have been competing against Costco for the entire duration of its existence. Even more so during the pandemic. Nothing has changed there. Hasn’t slowed it down, and if you’ve ever shopped at a Costco, you wouldn’t be comparing it to Whole Foods whatsoever. It’s not a supermarket chain, it’s a one-stop shop. That’s a completely false equivalency. They sell many items where the markup is quite large (laptops, alcohol, tech products, toiletries, disposables, list goes on and on). They’re selling more and more of these as time goes on, in addition to higher margin private label versions of the day’s hottest products (like kombucha).

You don’t mention the size of the revenue driven by memberships. Huge advantage to Costco that really only Amazon has, among the comps you made.

Multiples are high across the market. That’s a macro issue, not micro specific to this company. You fail to explain why Costco’s is any worse than any other comps. In fact, it isn’t, except for Walmart, which it generally doesn’t compete with geographically (Walmart seeks out lower income areas, Costco prefers higher income areas).

You also don’t mention the idea that consumer behavior may have significantly changed long-term due to the pandemic, favoring stores like Costco and Walmart where you can get everything you need at a low price in bulk in one trip. Costco has a significant moat actually, it’s generally the cheapest AND the highest quality retailer wherever it operates, across multiple categories as mentioned above. As you mention, digital sales will likely continue to grow and add more value: they have only recently started going after that market with any energy, and if they can offer the same deals at the same quality as in-store there’s no reason they cannot gain market share in that sphere as well.

Don’t necessarily disagree with your point that the multiple is high and the stock is expensive though, I just don’t know that that’s a Costco thing as opposed to a market thing
@ggerry you mention that Costco does sell some high margin items like Laptops, Alcohol etc. I watched an interview with the CEO about 5 years ago and. heard him say NOTHING is marked up over 15%. I love Costco and own the stock, but I believe the thinking that Costco sells some high margin items is not correct because they are not taking advantage of these typical high margin items.
Friendorfoe profile picture
@goblue16 Pardon my redundancy but you are exactly correct! This and the issue of the company's insistence on not fiddling around with that discipline is, perhaps, the key point when analyzing either the company or it stock performance.
ocvegasproperty profile picture
@goblue16 I know for a fact that any items marked up over 10% need executive approval.
Memberships not margin.
Article nicely done.

Couple of things to consider.

First, you neglected to mention China. COST hasn’t even started there but they do have agreements and plans, so it isn’t just speculation.

More importantly,
While a PE 30 for a retailer is unprecedented, same can be said of many other stocks - railroads, automakers etc.

Fiat money is inflating asset prices.
And no, I am not a goldbug.
What do about it? Market can stay irrational longer than you can afford to fight it.

Stay invested.

At best (or worst) sell some minor portions of some positions and raise cash - although in the long run that’s probably a bad idea.
"The company is competing with other giants like Walmart, Target, and Amazon (AMZN) with its Whole Foods subsidiary. If the competition intensifies, it will pressure the margins and will hurt EPS growth."

Not true. Costco profit is about what membership income is. Combining everything else and Costco sells at cost. None of the above mentioned companies can compete with that. Reading this article you would think Costco is going to fade away in a few years.
@John Troup
Author is conflating COST business model with those of competitors.
@John Troup Yes, Costco has no real competition. Still, it is pricey just now. I bought around 315-320 during recent dip; now holding. Under 300 would be a cherry entry, about the best we may see barring a market collapse.
@John Troup You are CORRECT. They make almost all of their profit from member ships and they cap markup at 15%. As a result of this cap, they are not making that much money from product they sell and that is especially true for their wonderful $1.50 hot dogs and fantastic $4.99 chickens.
*Doubled revenue in the last decade
*Organic growth
*Expects double digit sales growth this year
*Tripled EPS in the last decade
*Significant margin expansion
*13% average annual dividend growth rate
*Special dividends
*30% payout ratio
*Not diluting shareholders

And you still can't understand it's high PE ratio?
Add China to list - huge market in future, real not speculative, and not to be underestimated.
@Current$ea How can a thing be both "future" and "real, not speculative"?
Much better shopping experience than most others. Their prices are always competitive. The quality and prices of their Kirkland branded products are excellent. For example, their 25 year old single malt whisky costs less than half of what you would normally pay for a comparable product. I’ve owned their stock for a couple of years as part of my core holdings, with no plans to sell. An unexpected bonus was a $10 per share special dividend last December.
I think you are a young guy trying hard to apply what the professors just taught you. I'm sure you will do very well as you learn to apply what you learned when it is combined with some experience. This is a really great company.

Is it GameStop or bitcoin? No. However, if you buy and hold, at least as it looks now, you will do quite well. Probably much better than the S&P 500, which is very hard to beat.
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