Show Me the Money? Just Ask Costco
Thursday, November 29th, 2012
By Mitchell Clark, B.Comm. for Profit Confidential
In spite of the sluggishness in many of the world’s largest economies, there are some companies that are doing well—so well, that they have more money than they can handle. One such company is Costco Wholesale Corporation (NASDAQ/COST), which was just in the news for reporting a substantial $7.00-per-share dividend to shareholders, on top of its regular quarterly dividend. The company just announced strong retail sales in the four weeks ended November 25, 2012, and its first fiscal quarter of 2013 experienced a solid 10% increase in revenues.
On the stock market, Costco has been a powerhouse wealth creator over time. You have to imagine that those annual memberships are pure gravy for the company; having to pay a company in order to shop there is such a score. On the stock market, the stock appreciated to $54.00 from $10.00 between 1996 and 2000 on a split-adjusted basis. Then it didn’t do much of anything for the next 10 years. (See “Beat The Market? There’s Only One Way to Do It.”) It’s only in the last year that the company’s stock market price has taken off, while the rest of the U.S. economy is sluggish. This time last year, the stock was worth about $68.00 a share; now it’s at $100.00.
Chart courtesy of www.StockCharts.com
There are some tax reasons for the special $7.00-per-share dividend, but basically, the company is generating more cash than it can handle, so it’s returning some of that money to its shareholders. So many corporations are doing this. Rather than invest in new facilities, equipment, and employees, a company just returns the money to shareholders in the form of dividends or share buybacks. One-time dividends are very advantageous to a company, because they don’t lock it into a new quarterly dividend rate if times get tough.
Discount retailers have been doing great over the last several years. Consumers might not be buying too many high-end suits, but they still need business-casual clothes in the workplace. Companies like Target Corporation (NYSE/TGT), Wal-Mart Stores, Inc. (NYSE/WMT), and The TJX Companies, Inc. (NYSE/TJX) have all been outstanding wealth creators on the stock market in recent years. TJX has doubled on the stock market over the last two years.
With low borrowing costs and very conservative business planning, many large-cap companies have built up huge cash positions. And this is why dividends have been increasing. The outlook for the stock market might not be that strong, but the outlook for dividend-seeking investors remains good.
Earnings growth is flat, but corporate balance sheets are in excellent condition. The stock market is likely to keep moving downward, so long as uncertainty remains regarding the fiscal cliff. As I keep saying, dividends are going to be your only friend in 2013 if you’re a stock market investor. There really isn’t any reason why share prices should go up.