I Still Can't Believe Costco Spent $8.4 Billion on Special Dividends

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Based on its promised payout, Costco (NASDAQ: COST) isn't a strong dividend stock. The warehouse retailer's $2-per-share annual payment amounts to a paltry one-third of its earnings and the yield is below 1.3%. Compare that to broader market averages that yield 2% and pay about half of all profits out in dividends.

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Investors don't even need to leave the retailing industry to find bigger yields and more generous payout ratios. In fact, most of its peers, including Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), promise to return 50% or more of their earnings as dividends. Home Depot's (NYSE: HD) target payout is 55% and it yields 2.3% today.

Yet Costco has supplemented that small dividend with surprise, one-time cash payments to investors. The most recent special dividend hit shareholders' accounts in late May and was worth just over $3 billion, which pushed its total special payout past $8 billion since 2012.

Metric

2012

2015

2017

Per-share value

$7

$5

$7

Total value

$3.1 billion

$2.2 billion

$3.1 billion

That's a massive amount of cash. The retailer earned a total of $12 billion over the six fiscal years that span these payouts, which means the special dividend alone accounted for 70% of its earnings during that time.

Cash requirements

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Costco has no shortage of initiatives that require hefty cash investments. Unlike big-box peer Home Depot, it is still actively expanding its store base, for one. Costco plans to add 26 new warehouses to its base this year to come in just shy of its most aggressive annual addition yet. That's the single biggest component in capital expenditure spending that amounts to about $3 billion per year.

On the other hand, Costco's more conservative approach to the e-commerce challenge saves it cash relative to the competition. Home Depot, Wal-Mart, and Target are all bulking up their fulfillment infrastructure in a race to get shipping times to within one or two business days and counteract declining customer traffic at physical shops.

In Costco's case, management sees a much more limited role for the online segment since its subscription business provides cover against online-focused rivals. "We still are a brick and mortar entity," Chief Financial Officer Richard Galanti told investors earlier this year, "and we want to get you into the store because you're going to buy more in the warehouse."

Where the money comes from

Costco has opted to rely heavily on debt to fund the special dividends over the years. Its long-term liabilities were just over $5 billion as of the end of fiscal 2016, making it easy to see the rising debt levels that corresponded with the increased dividend payments.

And while the retailer has made progress pushing that figure down over the past nine months, it's set to jump higher again once the most recent payout hits the books.

In their May announcement, executives highlighted the fact that returning cash to shareholders in this way allows it to preserve its "financial and operational flexibility to continue to grow our business globally."

As a shareholder, though, I'd prefer Costco just boost its quarterly payout to bring it more in line with industry averages. A 50% payout ratio would still leave plenty of resources to devote to the retailer's expansion plans while giving income investors the kind of steady cash returns they already receive from peers in the space.

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Demitrios Kalogeropoulos owns shares of Costco Wholesale and Home Depot. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.