Is Costco Stock a Buy or a Sell Ahead of December 2?

Costco stock attracts investor attention with a special dividend payment

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Members-only retailer Costco Wholesale Corporation (NASDAQ:COST) operates warehouses in eight different countries and is the second largest retailer in the world, trailing behind only Walmart (WMT). Costco Wholesale has made a lot of noise around COST stock recently, after announcing a special $10 per share dividend for its investors. The company will be paying approximately $4.4 billion to stockholders on December 11. The last day to buy the stock and be eligible for this dividend payment will be November 30*Costco stock has a forward dividend of $2.40 and a dividend yield of 0.73%. Costco Wholesale has paid investors a dividend since November of 2004. Costco stock’s special $10 dividend comes at a yield of 3.05%.

Furthermore, COST has had an excellent year, up 30% year-to-date carving out a channel of higher highs since its annual low of $271.28 on Feb. 28. Costco stock is currently just a chip-shot from its all-time high of $389.50 that was hit on Nov. 9.

 Using Schaeffer's historical database, we conduct proprietary research on each underlying equity and determined which of those underlying equities’ options have historically had underpriced or overpriced options. We rank each equity’s options relative to the others in our database, with scores ranging from zero to 100. COST stock currently sports a ranking of 20 out of 100 on the Schaeffer's Volatility Scorecard (SVS). Low SVS readings like this one point to COST stock having consistently realized lower volatility than their options have priced in -- pointing to possible premium-selling candidates. 

Costco Wholesale has beaten expectations on three of its four most recent quarterly earnings reports. In the fourth quarter of 2019, Costco Wholesale beat expectations by $0.02. In the first quarter of 2020, the company beat expectations by a margin of $0.04. And in its most recent quarter, Costco Wholesale reported an EPS of $3.04 instead of the expected EPS of $2.84, This represented a $1.15 increase in EPS compared to the previous quarter. For its upcoming earnings report, currently slated for after the market closes on December 10, Costco is expected to report a drop in its EPS down to $2.00.

Costco Wholesale has increased its total revenue by more than $10 billion over the past four years. That fact alone is probably one of the biggest drivers behind the company's ability to pay out special dividends. Nonetheless, this is not the first time Costco Wholesale has paid a special dividend. The company has done so on three separate occasions previously. Costco Wholesale paid $7 dividends in 2017 and 2012 and also paid out a $5 dividend to investors in 2015.

However, investors should not be blinded by the high yielding special dividend. Including the $10 dividend, Costco Whole will end the year paying $12.40 per share on Costco stock, which comes at a current yield of 3.78%. Costco Wholesale seems to pay a special dividend roughly every three years. Rough calculation would have Costco paying a 1%-1.5% yield for long-term shareholders, which isn’t bad but also isn't jaw-droopingly good, either. Nonetheless, these payouts are, without a doubt, a sign of how well the company is performing. Costco Wholesale's solid balance sheet allows them to offer special dividends without compromising too much of its available cash. An issue of concern for investors when considering Costco stock is that it has a sky-high price-earnings ratio of 42.38.

*Editor's Note: A previous version stated the date as December 2. We apologize for the error.

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