Is Dividend Hike The Sole Reason Behind Costco's Gains?

Costco Wholesale Corporation’s (NASDAQ:COST) investors got a reason to cheer after this membership warehouse retailer announced a dividend hike along with a special payout, sidelining the woes which have gripped the brick-and-mortar retailers for some time now. Major chains are grappling with sluggish store and mall traffic as consumers choose to shop online from the comfort of their homes. But Costco, which plans to return $3.1 billion to stockholders via a special dividend, seems somewhat resilient to the challenging retail backdrop.

Dividend Hike Brought a Smile

Shares of Costco jumped roughly 2.4% on Apr 26, 2017, following the company’s declaration of a special cash dividend of $7.00 per share. The Board of Directors also raised quarterly dividend by 11% to 50 cents a share. Both payouts will be done on May 26. The dividend yield based on the new payout and the last closing market price is approximately 1.13%. Last year in April, Costco increased regular quarterly dividend by 12.5% to 45 cents.

Costco, which carries a Zacks Rank #3 (Hold), notified that the special dividend will be paid through additional borrowings. Investors prefer an income generating stock, and a dividend paying one is always a preferable option. People looking for regular income from stocks are most likely to choose companies that have a consistent and incremental dividend payout track.

What’s Makes the Stock Resilient?

So far this year, Costco’s shares have increased 10.4%, while the Zacks categorized Retail-Discount & Variety industry – which occupies a space in the bottom 25% of the Zacks Classified industries (191 out of the 256) – has declined 0.4%.

We believe that Costco prevails as one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities.

A differentiated product range enables the company to provide an upscale shopping experience for members, resulting in market share gains and higher sales per square foot. Moreover, Costco continues to maintain healthy membership renewal rate. Further, it is gradually expanding eCommerce capabilities in the U.S., Canada, U.K., Mexico, Korea and Taiwan.

The company’s strategic endeavors have helped it to post positive comparable-store sales (comps) performance. Comps for March increased 6%, following an increase of 4% in February and 7% in January. Notably, net sales increased 9%, 8% and 9% in March, February and January, respectively.

What concerns investors a bit is the company’s second consecutive quarter of negative earnings surprise as it reported second-quarter fiscal 2017 results. Total revenue also fell short of the Zacks Consensus Estimate for the ninth straight quarter. Further, stiff competition from BJ’s Wholesale Club and Sam’s Club, a division of Wal-Mart Stores, Inc. (NYSE:WMT) , has been a concern.

Stocks to Consider

Better-ranked stocks include The Children's Place, Inc. (NASDAQ:PLCE) sporting a Zacks Rank #1 (Strong Buy) and Burlington Stores, Inc. (NYSE:BURL) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place delivered an average positive earnings surprise of 39% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Burlington Stores delivered an average positive earnings surprise of 26.3% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

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