Costco Wholesale Corporation (COST) in its attempt to optimize its shareholders’ return decided to employ its available free cash in raising its quarterly dividend and also approved a share buyback program.
The wholesale club retailer raised its quarterly dividend by approximately 17% to24 cents from 20.5 cents. The increased dividend will be paid on May 27, 2011 to stockholders of record as of May 13, 2011.
Additionally, the company also announced a share repurchase program, replacing the previous program, which is scheduled to expire on July 2011.
The recently announced program, which is set to expire on April 2015, authorizes the company to buy back up to $4 billion shares of its common stock. Costco had about $800.0 million left at its disposal under its old repurchase program.
Increase in dividend reflects the company’s sound financial position and well-defined future prospects. The signs of recovery in the economy have made share buybacks and dividend increases a common factor among companies sitting on extra cash. These strategies will enhance shareholders’ return and lift the market value of the stock.
Costco currently operates 581 warehouses, including 425 in the United Statesand Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 8 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of its merchandise. The company’s strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track amid beleaguered economic conditions as cash-strapped customers continue to see Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is well positioned in the warehouse club industry.
A differentiated product range enables Costco to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, the company maintains a healthy membership renewal rate.
However, Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.
Currently, we prefer to maintain a long-term ‘Neutral’ rating on the stock. Moreover, Costco holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
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