Costco is a great company, but is its stock really worth buying? 3 things investors need to know before taking the plunge

When it comes to retail, few companies outperform retail. costco (expense -1.13%). Warehouse Club has built a loyal customer base spanning 47 U.S. states and 14 countries.

There is tremendous room for growth both domestically and internationally, and the company has avoided the cultural pitfalls that hinder international expansion. walmart and home depot.

Despite such opportunities, investing profitably in retail stocks can be more difficult. Investors who are aware of this should consider these factors before opening a position.

1. Costco’s growth slows

On the surface, Costco still appears to be thriving. As of early February, it had grown to 874 locations, 602 of which were in the United States. This provides minimal coverage in 13 other countries. Many mid-sized cities in the U.S. do not have Warehouse Clubs, and many major cities do not have business centers, the type of Costco store designed for businesses. So there is plenty of room for expansion.

Nonetheless, comparable sales growth in January was less than 3% compared to the same period last year. And even considering the first 22 weeks of fiscal 2024 (ending February 4), the growth rate is less than 5%. In January 2020, just before the shutdowns began, Costco reported a decline of nearly 7% in January and more than 6% for the previous 22-week period (ending February 2, 2020). These results won’t undermine Costco as a company, but they could discourage investors from buying the stock.

2. Stock price and valuation

Of course, slowing growth hasn’t deterred investors so far. Costco’s stock price rose more than 40% last year.

The increase did nothing to slow Costco’s rise, as did the late Charlie Munger, who held on to the stock until his death in November 2023. But his longtime partner, Warren Buffett, approved the sale of Costco. Berkshire HathawayThe entire position was made in late 2020. The decision comes after Berkshire held the position for more than 20 years.

Rising values ​​may have prompted such a move. Today, the price-to-earnings ratio (P/E) has reached 49. It may now be more difficult to profit from this stock, given its earnings multiples due to slowing growth.

3. Company dividends

Another issue with Costco stock that has limited appeal is its dividend. The annual dividend rose to $4.08 per share, marking the 19th consecutive year of increases to this level. Nevertheless, if converted to a dividend yield of less than 0.6%, this is less than half of the dividend yield. S&P 500 Average 1.4%.

Costco shareholders sometimes benefit through special dividends. In January, shareholders received a special dividend of $15 per share, the company’s first additional payment since 2020.

Unfortunately, this only brings the 2024 return to 2.6%, which is well below the 2.9% return. target Shareholders receive it annually. This makes Costco stock unlikely to be an attractive stock for income investors, and even Costco bulls won’t buy the stock for this reason.

Don’t Buy Costco Stock Anymore

Even though Costco continues to thrive as a retailer, investors probably shouldn’t add to the stock. In fact, Costco’s continued growth may cause some long-term shareholders to choose to maintain their positions.

Still, the combination of slowing sales growth and rising stock prices is unlikely to bode well for new investors. Even taking special dividends into account, Costco’s dividend is unlikely to motivate investors to buy the stock.

Ultimately, Costco’s store additions and loyal customer base will probably continue to boost sales. However, if looking to invest in retail stocks, prospective investors will likely find higher returns elsewhere.