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Costco Stock ($COST) Analysis

Updated: Jan 11

Costco is the world's 3rd largest retailer, 12th largest company in the SP500, and has a market cap of $199~ Billion. In FY21' Costco did $192 Billion in sales from their 815 warehouses globally. Additionally, 61.7 million households have active Costco memberships, bringing Costco another $3.9 billion in membership fees alone, all with a 91.3% renewal rate. Let's take a closer look at Costco from an investment standpoint.

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Table of Contents

P/E Ratio

Free Cash Flow

Profit Margin

Costco Dividend Yield & Dividend Yield on Cost

Dividend Payout Ratio


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Costco P/E Ratio

Costco's historical P/E hovers around 32x - 35x. Costco's current P/E ratio sits around 48x which is decently high considering its' historical averages. The increase in Costco's TTM and current P/E ratio is due to Costco's stock price appreciating by 44%~ in the last six months alone. I expect Costco's stock price to stabilize or fall slightly in 2022 as the P/E ratio returns to normal values as long as Costco's earnings continue to grow. The recent Covid variant could affect Costco's performance moving into 2022 if the areas where they operate return to lockdown, primarily US and Candian storefronts.

Costco P/E Ratio History

Costco Free Cash Flow

Costco continues to increase their FCF with TTM values sitting around $6 billion. This is ~45% increase in FCF when compared to their 3Y FCF value around $4.2 billion. Costco's ability to keep increasing free cash flow will ensure they can pay creditors and contributes to the safety of their dividend. Although not guaranteed, Costco has paid special dividend three out the last six years. This is a nice bonus to shareholders considering Costco's yield is sub one percent.

Costco Free Cash Flow

Costco Profit Margin

Costco has historically kept their profit margins right around 2%. The TTM value sits just below 2.5% which is strong indicator for Costco that customers are returning to stores post Covid. 2.5% may not seem like a high number but remember Costco generated around $192 billion in sales last year, meaning they produced a profit on that around $4.8 billion. Couple that with their membership fees as they have healthy sustainable margins.

Costco Average Profit Margin

Costco Dividend Yield & Dividend Yield on Cost

Costco's dividend yield, as of 26 November 2021, sits at .58% which is the lowest it's been when compared to historical averages. Again, this is attributed to Costco's stock price appreciation of ~44% over the last six months. This is another indicator that Costco shares may be overvalued and you should wait to invest. Costco currently pays $3.16 in dividends per share per year. Absent a dividend increase Costco's price would need to drop to around $430 per share to realign its dividend with the 3Y average. It's unlikely that Costco is going depreciate by 22% from its current $550 per share value.

Costco Dividend Yield

Costco's Yield on Cost is where you as an investor can get your return on investment when it comes to building passive income. Costco has a high compound annual growth rate (CAGR) around 13% meaning if you had bought Costco 15 years ago your YOC would be above 6%! Considering Costco has routinely increased their dividend at a rate higher than average you can see your dividends increase quickly without having to invest more capital. This is one of the reasons I decided to invest in Costco. Costco has been increasing their dividends for the past 17 years and I expect that trend to continue as they move closer to joining the dividend aristocrat list.

Costco Yield on Cost
Costco Dividend CAGR

Costco spends approximately $1.4B per year to maintain their dividend. This and the growth associated appears safe considering Costco's ability to maintain and increase free cash flow and profit margins.

Dividend Payout Ratio

Lastly, Costco's dividend payout ratio sits around 27% with an average around 29-31%. This is significantly lower that most dividend companies including some long-standing dividend aristocrats. Costco is only paying around 30% of its earnings out as dividends meaning they have money available to continue funding further expansion in the future. Costco has strong track record of consistently increasing earnings YoY which contributes to their ability to maintain a stable dividend payout ratio. This will also ensure they are able to continue growing their dividend in the future.

Costco Dividend payout ratio


Costco is a great growth stock that also pays a dividends. Currently, however, Costco is overvalued. Looking at the current FIBs I wouldn't expect the price to fall below the .786 FIB at $502. If you are looking to add to your position or start a new position I would wait for a pullback in December or early 2022. Costco is overvalued when you compare both Dividend Yield and P/E ratios with their historical values. I also expect Costco to raise their dividend in 2022 so getting in prior to the increase will help boost your yield on cost so you could always invest now if that's what you're look for. I'll be watching Costco's price action over the next month or so to find a good entry point to expand my current position.

Happy Investing!

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