Costco's Next Special Dividend May Be Coming Sooner Than Investors Realize

Costco Wholesale Corporation COST is getting strong early returns from its e-commerce investing, and at least one Wall Street analyst says investors could expect some major returns from a special dividend coming sooner rather than later.

The Analyst

Wells Fargo analyst Edward Kelly upgraded Costco from Market Perform to Outperform and raised his price target for the stock from $195 to $220.

The Thesis

Costco has a sound business model that has emerged as one of the few winners in the difficult retail environment, Kelly said in a note. A ramp in e-commerce sales and the potential for a large special dividend announcement could both serve as positive near-term catalysts for the stock.

“We expect the company to sustain strong comp momentum despite difficult comparisons, deliver improved membership trends, navigate rising retail cost pressures, and beat consensus expectations,” Kelly said.

Kelly admits the stock’s valuation is a bit high at the moment, but said it's nowhere near its prior peak valuation levels. In addition its robust growth numbers suggest Costco can easily grow into its valuation.

In fact, Kelly says the difficult comps Costco is facing in the first half of 2018 could actually be weighing down the stock, but the company should have no problem sustaining its mid-single-digit growth numbers.

Costco has a history of making large one-time 4 to 7 percent special dividend payments every two to three years. Despite the fact that the last special dividend came just a year ago, Kelly says the next one could be on the way soon considering Costco’s strong cash flows and the benefits from tax reform.

Price Action

Costco stock traded higher by 3.2 percent to $195 following the upgrade.

Related Links:

4 Potential Overstock Catalysts That Make DA Davidson Bullish

Costco's 'Strong' March Comps Suggest Consumer Value Proposition Is 'Winning'

Photo by Stupendousmat/Wikimedia.