Market Overview

Does Costco's Special Dividend Prove Retailing Isn't Dead?

Does Costco's Special Dividend Prove Retailing Isn't Dead?

2017 could prove to be a record-breaking year for retailers closing their stores, but one company demonstrated a sign of strength by doing something no other retailer has done since early 2016.

Costco Wholesale Corporation (NASDAQ: COST) announced on Tuesday it will pay investors more than $3 billion through a one-time special dividend of $7 per share. In addition, the company also announced a boost of its quarterly cash dividend from $0.45 per share to $0.50.

Costco cited its strong balance sheet and its ability to pay investors billions of dollars while simultaneously preserving its financial and operational flexibility and grow its business globally.

According to a CNBC report, Costco's gesture signals that not all retailers are struggling although the last retailer who is also a member of the S&P 500 index to pay a special dividend was Best Buy Co Inc (NYSE: BBY).

Baird: Dividend Is A 'Valuable Reminder'

Peter Benedict of Baird Equity Research commented in a research report that Costco's dividend is a "valuable reminder" that the company's business model "can work for shareholders" as well.

Benedict further noted that even if Costco primarily funds the dividend through borrowings, its balance sheet will remain "extremely strong" at around 1.5x lease-adjusted debt to EBITDAR and a "modest" earnings per share dilution of 3 percent associated with the incremental leverage.

Benedict also pointed out that Tuesday's special dividend is the third special divined the company has paid ($5 per share in 2015 and $7 per share in 2012) while also paying shareholders a quarterly dividend. All in, the analyst believes that Costco is returning an "appropriate" amount of capital to shareholders.

Bottom line, Costco's special dividend along with easing top-line comparisons, moderation of food deflatio and "discrete" profit drivers such as a Visa Inc (NYSE: V)/fee increase all reinforces the bullish case for owning Costco's stock.

Shares remain Outperform rated with an unchanged $200 price target.

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