Estimated read time: 4 minutes
Publication date: 26th Jul 2022 13:14 GMT+1
There are few sectors in the world that can compete against inflation or a recession. The ones that can take on both these economic challenges together are even fewer. Retail groceries, in particular, is one such sector. And Costco Wholesale Corporation (NASDAQ: COST) is one of the best bets in this space. Costco is the fifth-largest retail company in the world with operations in 13 countries. It is one of the top sellers of wine, rotisserie chicken, organic goods, choice and prime beef, and organic groceries.
Among the elite group of top international retailers, Costco has one of the most reliable operations. Costco stock has increased 7.15% over the last six months and is only down about 8% in 2022, despite the fact that the majority of firms throughout the world have largely failed to perform. Because of this, the market as a whole is growing more confident about the performance of its stock.
Costco shields against recession
As the Fed raises interest rates steadily to combat inflation levels that are at a four-decade-high, fears about an impending recession are gaining pace. According to predictions made by Bank of America (NYSE: BAC), food companies like Costco may do significantly better than other stocks as the US economy continues to slide towards a recession. It is because customers would rather prefer to spend more time at home and cook instead of going out for expensive meals.
Even in this weak market, Costco has continuously performed well. The company has benefited greatly from the consistent traffic growth and the high rates of membership renewal, and as a result, has stood out in this enormous retail market.
Also, it has been consistently experiencing a quick turnover in its stored inventory, thus reducing the likelihood of its business holding stale goods like Walmart (NYSE: WMT) and Target (NYSE: TGT). Additionally, Costco's gasoline division has given the company a considerably larger moat throughout the current economic crisis.
Therefore, as the fear of recession amplifies further many people will be preferring to put their money in Costco to shield their wealth.
Costco’s improving financials
Another reason to prefer the Costco stock is its improving financials. As per the company’s latest update regarding its June sales, Costco has managed to deliver sales of $22.78 billion for the retail month of June indicating an improvement of 20.4% from the $18.92 billion reported during the same period last year.
Further, for the forty-four weeks ended July 3, 2022, Costco’s net sales came at $188.34 billion depicting a growth of 16.9% year-over-year compared to $161.09 billion generated last year.
Besides, the update also reveals the June same-store sales of the company excluding fuel sales have shown an impressive 13% uptrend from last year while the store traffic has surged 10.2% year-over-year including a 13.2% and 8.3% improvement in the core U.S. sales and e-commerce sales respectively. The best part was despite the slowing down of the economy an improvement was noticed in all of its merchandise departments.
Regular dividend payer
Everyone's wealth is being impacted by the present market's inflation. As a result, many investors now favor companies that offer dividends which acts as passive income. Costco has a track record of consistently increasing its dividends and paying them out on schedule. With the exception of 2020, the company has always increased its payouts by double digits since 2012. Additionally, the improvement of its financials shows that Costco will be able to continue paying dividends even in the upcoming years.
Costco is currently trading at $530, and the average consensus target for the stock is $566.62 which is a potential upside of 8.3%. Costco is, in essence, a fantastic stock with an attractive valuation. The company has never failed to provide its clients with a great value offering, whether they are purchasing fuel or other things at a discounted price.
Further, it has consistently delivered top-notch business throughout the prosperous periods and has shown resilience during difficult times. For this, Costco had to barely suffer during the most recent recession in 2008 and 2009. In light of this, the Costco stock may be a wise investment at the moment.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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