Costco Announces 9.8% Growth in Net Sales
- By Alberto Abaterusso
Costco Wholesale Corp. (COST) has informed the market Thursday before opening that net retail sales came in at $12.77 billion in November reflecting a 9.8% growth from $11.63 billion a year ago.
Comparable sales grew 12.2% in the U.S., 1.8% in Canada and 0.7% in the international market. The company's total comparable sales climbed 9.2% in November. Sales from e-commerce grew 46.1%.
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The intrinsic value of COST
Excluding the impact of gasoline prices and currency swings, same-store sales in November increased 10.1% in the U.S., 5% in Canada and 3.7% in the rest of the world. The company's total comparable sales increased 8.5% and e-commerce sales rose 34%.
The 9.8% number reflects another strong period of growth that follows the 10.3% number for the retail month of October. The company has already built two-third of its top line for the first quarter of fiscal 2019 and is well on track to exceed consensus for a quarterly revenue of $34.72 billion.
The impression is that Costco Wholesale Corp. is off to a good start with the creation of its revenue and profit for full year 2019, which are given by consensus rising markedly, not only in 2019 but also for at least the following three years. That will be good for shareholders of Costco who are going to take advantage of the situation in terms of a higher dividend.
Let's start the analysis from the share price. Costco Wholesale Corp.'s share price jumped 3.03% to $233.2 on Thursday. The stock increased 24% for the 52-week period through Dec. 6 and outperformed the S&P 500 index by 23%. Costco is trading slightly above the 50- and 100-day simple moving average lines and far above the 200-SMA line.
The share price at close Thursday falls within a 52-week range of $175.79 to $245.16.
The jump in the share price following the release of figures on retail sales for November has dragged the forward dividend yield down slightly at 1.01%. The forward dividend yield is resulting from a cash dividend of 57 cents per share that the U.S. large retailer is distributing to its shareholders every quarter.
More than for its forward yield, which, compared to the industry's median of 2.22% and to the S&P 500 index's dividend yield of 1.94%, is not one of the most compelling in either the industry or on the entire market, it is for its long payment history that Costco should attract investors.
Costco has been distributing a dividend for almost 15 years. The U.S. global chain retailer shops corporation has progressively increased its dividend per share through time and at an average 12.8% rate every year over the last five years. This information is additional proof that Costco is a loyal dividend payer.
The distribution of future dividends will be underpinned by a total amount of cash available on hand and in short-term securities of about $2.26 billion or $16.57 per share. The total cash alone is enough to cover the payment of the annual dividend for more than seven years. However, this war chest will hardly be notched because the cash flow the company can generate from its operations is more than five times what is needed to finance the dividend.
The company can allocate on the payment of dividends a significant portion of the trailing 12-month operating cash flow. This is possible thanks to a business that is moderately leveraged, an impressive facility with which the company sustains the cost of the financial burden and to sales that are steadily up trending as is shown by below chart of GuruFocus. The chart is also indicating that annual sales have grown according to an average 5.6% rate over the last five years, which is below the industry average of 8.63% but above the median of the sector of 4.25%.
Looking ahead, analysts are predicting that net earnings will grow at an average of 11.92% every year for the next five years. This means that shareholders of Costco may likely enjoy further hikes in the cash quarterly dividend. At which pace? In this instance the past comes to support our guesses. Since the company has increased the annual dividend according to a 12.8% average rate every year over the last five years, we can expect a similar raise for the next five years.
As described before, the company can financially sustain the increase. And, the pay-out ratio of 30% indicates there is still plenty of net earnings to be paid out to the shareholders.
The stock seems to be not cheap according to the following ratios and compared to its industry.
The price-sales ratio is 0.73 versus an industry median of 0.48.
The price-book ratio is 7.98 compared to the industry median of 1.73
The forward price-earnings ratio is 29.15 versus an industry median of 17.83.
When the forward price-earnings ratio is multiplied by a forecasted earnings per share of $7.74 for full year 2019, it yields to a value of $225.62 versus the price of $233.2 per share at close Thursday.
The stock appears to be overvalued also based on the Peter Lynch chart powered by GuruFocus.com. In fact, the current share price is above the Peter Lynch Earnings Line (P/E = 15) and the Price at Med P/E without NRI (P/E = 24.9).
With its secure stream of dividends paid, over $7.2 billion in total liquidity available in cash on hand, an annual sales turnover that is going to hit $153 billion in 2019, $163 billion in 2020 and $175 billion in 2021, Costco Wholesale Corp. is undoubtedly a good stock for dividend income investors.
However, I would not increase now but hold the stock in anticipation of a significant weakness. A retreat to levels below the 200-SMA line's value of $212.22 within the 52 weeks is possible if the share price continues to downtrend as it did in November when it lost almost 3%.
The U.S. Federal Reserve's continuing policy of gradual rate increases will discourage investments, squeeze revenues and profit of most U.S. companies, and produce a general downtrend of publicly traded U.S. equities. Then, Costco should trade more compellingly. The S&P 500 index, a benchmark for the whole U.S. stock market, already decreased 6% over the last six months.
The recommendation rating is 2.2 out of 5, and the average target price is $243.83 per share.
Disclosure: I have no positions in any securities mentioned in this article.
Read more here:
Costco Announces 10.3% Growth in Net Sales
National Retail Federation Forecasts Growth During Holiday Season
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 7 Warning Sign with COST. Click here to check it out.
The intrinsic value of COST
