Like him or hate him, it’s a fact that Jim Cramer is one of the personalities in the financial media that investors can certainly talk about. He’s an opinionated individual with very strong views on the key stocks he likes and has continued to hold. His table-pounding recommendations of Nvidia (NASDAQ:NVDA | NVDA Price Prediction), which he is still pounding the table on, have turned out gloriously. However, some of his other picks have turned out, shall we say, less profitably for investors.
While many retail investors have bemoaned his previous calls that the meme stock trade was a bubble, and have suggested Nvidia is overvalued, it’s also true that some of Jim Cramer’s long-time picks have turned out well.
Here’s why Costco (NASDAQ:COST) is another one of his winners worth focusing on. Yes, it pays a small dividend of just 0.55%, but that’s a dividend nonetheless. And this company’s impressive growth over the long-term more than makes up for a minuscule yield investors would receive today by putting fresh capital to work.
So, let’s dive into why I think this particular dividend stock pick makes sense, and why this stock still looks like a buying opportunity on dips moving forward.
A Dividend Stock That’s Not Really a Dividend Stock
Stack of gold coins tripling in value
Costco is, by all accounts, one of the best growth stocks we’ve seen in the retail space in a long time. Using a once-bespoke strategy of enticing higher-income consumers into its “exclusive” membership club, Costco has been able to provide shoppers with some of the lowest prices in the industry combining the scale of its buildings outside city centers with products packaged in bulk.
Cramer has taken a very bullish view on Costco’s unique business model an many an occasion, pointing out to investors that this company’s operating model has created one of the most loyal customer bases in the industry. As a Costco shopper, I can say that’s probably true.
The fact that Costco is a blue chip name in most indices is one thing. But having the kind of scalable and sustainable growth profile long-term investors are looking for makes this company one with a very easy-to-understand investing thesis. Perhaps that’s the point – Cramer’s audience can understand why this is such a good pick, and that’s reason enough for many retail investors to jump aboard his recommendation, even if they don’t like the man.
Recent Earnings Tell a Bullish Story
A man assessing financial reports at his desk
Cramer’s repeated calls for investors to “buy Costco here” due to the company’s incredibly steady cash flow growth profile and membership renewal rates above 90% is one thing. Anyone can tell you to do anything. It’s up to you to listen.
Personally, I prefer to look at what the numbers say and make my investing decisions on that basis. No matter how much a talking head will get worked up about a particular company or issue, hard data matters a great deal when modeling out where one thinks a stock is headed over the long-term.
On this front, Costco’s impressive Q4 revenue surge of 8% is impressive, given the company’s size and scale. As many may expect, this revenue beat was driven by membership fee revenue which surged by 14% in the quarter, while comparable same-store sales grew around 6%.
That’s very healthy growth for a company that produces more than $2.6 billion in profit a quarter. With a strong and growing e-commerce business, and an increase in the number of younger members joining its exclusive club, I do think there’s a bright future for investors in this name.
Costco Isn’t Cheap, But It’s Worth Every Penny
Money and a calculator on a desk with a toy truck
Investors certainly have a range of other retail stocks to choose from trading around 10- to 15-times earnings to go after. Value is what many retail investors (and shoppers) are searching for, after all.
That said, it’s also true that you get what you pay for. And Costco’s industry-dominant growth rates in combination with its scale and defensive attributes make this a stock that carries a hefty premium multiple.
While a forward price-earnings ratio of more than 46-times, one could make the argument that Costco is expensive even for a growth stock. The thing it, it’s a growth stock (that pays a dividend which was once meaningful). Owning shares of such companies that have seen their dividend yields decline as their share prices have soared has traditionally been a winning strategy. And I don’t see any reason why that should be different for Costco shareholders over the long-term.
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