Company Description: Costco Wholesale Corporation operates over 650 membership warehouses in the U.S., Puerto Rico, Canada, the U.K., Taiwan, Japan, Korea, Mexico, Spain, and Australia.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
COST is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 220.4% premium to its calculated fair value of $58.6. COST did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
COST earned one Star in this section for 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 2004 and has increased its dividend payments for 15 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in COST would be less than a similar amount invested in MMA earning a 20-year average rate of 2.64%. If COST grows its dividend at 5.3% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.64%.
Peers: The company's peer group includes: Wal-Mart Stores Inc. (WMT) with a 2.0% yield, Target Corporation (TGT) with a 3.7% yield and Home Depot Inc. (HD) with a 1.9% yield.
Conclusion: COST did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks COST as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $42.56 before COST's NPV MMA Differential increased to the $2,000 minimum that I look for in a stock with 15 years of consecutive dividend increases. At that price the stock would yield 4.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,000 NPV MMA Differential, the calculated rate is 18.7%. This dividend growth rate is higher than the 5.3% used in this analysis, thus providing no margin of safety. COST has a risk rating of 1.75, which classifies it as a Medium risk stock.
Costco operates a warehouse club model, deriving the majority of its operating income from membership fees and the rest from below-average markups on merchandise, including fuel. As of August 28, 2016, the Company operated 715 warehouses across the world. The average warehouse space is approximately 144,000 square feet. The company's debt to total capital of 37% and free cash flow payout of 27% are both well below my desired maximum. However, the stock is currently trading at a significant premium to its $58.60 calculated fair value.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in COST (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: COST, WMT, TGT, HD,