When it comes to listing out names of some of the best retailers in the world, only two names come to our mind – Walmart (WMT, Financial) and Costco (COST, Financial). When we further apply filters on this section to find out the highest-paying retailer in the world, Costco emerges the clear winner. It pays high wages to its workers and gives them a reasonable sum of dividends every year. In addition to this, it recently surprised its shareholders by announcing a special dividend. This one-off dividend announcement brought joy to the investors and had a positive impact on the share prices as well. Let us look at the details of this special dividend in detail below.
Strong financial health
During January 2015, Costco Corporation announced that it would pay out a special dividend of $5 per share to its shareholders on February 27. This announcement reiterated two important facts – that the company cares a lot about its investors by paying out this in addition to the normal annual dividends of $1.44 per share and that the company is in a great financial position as it has enough free cash flow for these special payouts. The total cost of these special dividends will be a huge $2.2 billion; however, Costco is in a strong financial position to take up this responsibility right now.
This is the second such case of special dividend announcement from Costco. During November 2012, the company announced a more than reasonable $7 per share as special dividends. It cost around $3 billion to fund this initiative during that time. Costco, being the highest-paying retailer in the world, enjoyed a special place of privilege among lending institutions; hence funds for the special dividends were arranged through borrowings that Costco made at subsidised interest rates that were applicable for its brand name.
The dividend growth and the payout ratio of Costco from the year 2005 to 2014 are seen in the pictures below:
From the second picture, it is obvious that for the past 10 years, the payout ratios have been in the range from 19.7% to 28.6%. These are enough clues to indicate that Costco has a big window to increase dividends in the future as it has close to 70% of the free cash flow generated intact with it in all these years. It is through these initiatives that Costco keeps on proving that in terms of increasing shareholder value; it is indeed one of the best not only in the retail sector, but among all industries.
Improved earnings and excellent control over debt
For the first fiscal quarter of 2014, Costco reported an increase of 20.1% and 17% in operating cash flow and profits respectively. Costco’s main strategy of running a successful business in spite of offering huge discounts was the “membership model.” The company managed to add more members into this program, through which a 6% increase was witnessed in the membership fee segment. In addition to this, renewal rates were at an all-time high of 90%, which proves that many customers were willing to extend their relationship with Costco. Due to all these factors, net quarterly sales and same store sales increased by 7.4% and 7% respectively from the same period of 2013.
Costco plans to invest $2.5 billion in capital expenses during this year, meaning expansions and improvements are on the way. With the first fiscal quarter showing $5.97 billion cash flow, Costco is in such a strong position that it will still be able to have close to $94 million on hand, even after paying off all its outstanding debts worth $5.03 billion. This way, Costco can get rid of its debt without having to shrink any of the benefits extended to its investors.
Conclusion
With a plan to open at least 31 new stores and focus on improving e-commerce business opportunities, Costco is all set to add more value to its investors this year as well, just as it has been doing so in the past. Effective business strategies and huge investor confidence are the two main strengths of Costco and the company will continue to capitalize on these to grow further in the coming years.
