Costco Wholesale (COST -1.72%) is incredibly popular, particularly among price-conscious shoppers drawn to its bulk-buying model and competitive prices. Its stock has soared by 41% over the past 12 months, outpacing the benchmark S&P 500 by roughly 20 percentage points.
Any time a stock surges like that in a relatively short period, prospective investors may wonder how much bigger the company can get. So let's examine the company's recent financial results, potential risks, and prospects for growth.
Costco is putting up record results
With the membership-only retailer's stock trading at near-record highs, it shouldn't be surprising that its top and bottom lines have been hitting record levels. Specifically, for the trailing 12 months, Costco generated $245.7 billion in revenue and $6.5 billion in net income. For comparison, Costco generated $231 billion in revenue and $5.9 billion in net income in the preceding 12 months, representing year-over-year increases of 6.4% and 10.2%, respectively.
Costco's low-markup model relies on its memberships, and it recently exceeded 72 million members. Costco has increased its membership base by 7.6% over the past 12 months as it reportedly cracked down on shoppers from different households sharing membership cards.
Dividend history and balance sheet
Costco is a dividend-paying stock known for periodically paying special dividends in addition to its regular quarterly distributions. The most recent of these -- its fifth special dividend in 11 years -- was a $15 per share distribution in January 2024. And Costco has raised its regular quarterly dividends every year since it began paying them in 2004.
Given Costco's history, shareholders can reasonably expect management to announce another boost to its quarterly dividend soon, given that it has paid a $1.02 per share dividend for four consecutive quarters.
Management can feel at ease about raising the dividend because of Costco's immaculate balance sheet. At the end of its most recently reported fiscal quarter, it had $10.9 billion in net cash (cash and cash equivalents minus total debt), more than enough to cover the estimated $6.7 billion cost of the special dividend and $900 million for its quarterly dividend.
Another benefit of Costco's strong cash position is that it won't be saddled with growing interest expenses as rates remain elevated, in contrast to competitors like Target (NYSE: TGT) and Walmart (NYSE: WMT), which have net debts of $14.1 billion and $38.5 billion, respectively.
COST Net Financial Debt (Quarterly) data by YCharts.
What could go wrong for Costco?
The late Charlie Munger, former vice chairman of Berkshire Hathaway, once called Costco a "perfect" company, but acknowledged one main flaw of the stock: its expensive valuation. Indeeed, based on its price-to-earnings (P/E) ratio, the stock looks expensive compared to its peers and historical average. As of this writing, Costco trades at a P/E ratio of about 48.9, significantly higher than Target and Walmart at 18.6 and 27.8, respectively.
Given Costco's solid financial position and consistent outperformance compared to the market, it's logical that the stock commands a premium valuation compared to its big-box retailer peers. However, considering that Costco's average P/E ratio over the past five years was 38.4, there are legitimate concerns that the stock is significantly overvalued now compared to its own historical standards.
COST PE Ratio data by YCharts.
Where could Costco's growth come from?
Outside of its low-margin net retail sales, the company could pull two levers for further growth. First, it could increase the prices of its annual memberships, which generated approximately $4.7 billion in high-margin revenue over the trailing 12 months. Management has raised those fees roughly every five years. With the most recent increase having occurred in June 2017, it stands to reason that the next hike could come sooner than later.
Additionally, Costco could expand its footprint. It has only 871 locations, 748 of which are in North America. The company opened 23 net new locations in its fiscal 2023 and plans to open 31 during its current fiscal year. Notably, Costco is one of the few U.S. retailers that has successfully broken into China. The company only has five stores in China, but with a population of over 1.4 billion, the country offers tremendous growth opportunities.
The pace will likely be slow and steady, though, as it's clear that Costco's management prefers tactical growth to breakneck speed, prioritizing long-term health over short-term growth.
Is Costco stock a buy today?
Costco is one of the best public businesses you can own, but its stock does trade at an excessive premium right now. For prospective long-term investors afraid of the price, you can either add it to your watch list in hopes of a drop or dollar-cost-average your way into a position, building your stake over time to get a range of prices for the stock.
