Shopping habits can say a lot about consumers and retailers. Some people prefer stores where they can get what they need in one trip. Others are happy to buy in bulk if it means getting a better deal.
That demographic perfectly captures the difference between Walmart shoppers and Costco shoppers. Both companies dominate the retail industry, but they take very different approaches to winning over shoppers.
Naturally, it gives investors something to think about. If these two retail giants follow such different strategies, which stock really deserves a place in a dividend portfolio?
To find out, let’s take a closer look at Walmart and Costco and compare their business models, financial strength, dividends, and what Wall Street currently thinks about both stocks.
In hallway one, we have Walmartthe world’s largest retailer known for its everyday low prices. With thousands of stores around the world, Walmart has become the one-stop shop for everything from groceries and household necessities to clothing and electronics. Walmart is also one of the largest companies globally, with a market capitalization of almost $1 trillion.
Today, it trades around $125 per share, which is up about 12% year to date.
In hallway two, we have Costco. It’s also a one-stop shop offering virtually anything under the sun, including groceries, daily necessities and electronics, and more. What sets Costco apart is its membership model, which results in a very loyal customer following.
With a market capitalization of $440 billion, Costco is less than half the size of Walmart, but that alone doesn’t make it any less investable.
Right now, COST stock is trading around $1,003 per share, which is up 16% year to date.
Now, let’s take a look at the business models of both companies.
Walmart operates a high-volume, low-price model by capitalizing on its huge product portfolio.
The company keeps prices low on thousands of items as a result of a super-efficient supply chain. Think of it as a store that sells a little of everything, but makes money by selling a lot. Buying in bulk also means better bargaining power with your suppliers. It also keeps costs low for its customers.
Costco, meanwhile, operates under a membership-based warehouse model with fewer product options than Walmart.
The company keeps its product selection intentionally limited and focuses on selling wholesale items. Looking for a pound of sugar? At Costco, you’ll buy a lot more than just a pound. But you will get a great price.
Another difference is that Costco makes money through membership fees, which generates a steady stream of revenue and also helps keep product profit margins relatively low.
In short, Walmart relies on scale and convenience, while Costco relies on wholesale prices and member loyalty to drive its business.
If we compare the latest quarterly financial statements of each company:
Metric
Walmart
costco
Sales
$179.5 billion
$69.6 billion
Net income
6.1 billion dollars
$2 billion
Price/Sales
1.40
1.61
Price/Earnings (forward)
43.28
49.16
Right off the bat, we can see that Walmart has significantly higher revenue than Costco. Its net income is also higher, at $6.1 billion, compared to Costco’s $2 billion.
Now, let’s move on to the ratings. The price-to-sales (P/S) ratio compares a stock’s current market price to its earnings per share to measure how expensive it is. The lower the P/S, the better.
However, “low” here is a subjective value. To get a better idea of the company’s current valuation, we should look at the sector median.
The consumer staples sector has an average price-to-sales ratio of 1.04. That means both companies are trading slightly above the industry median.
On the other hand, the forward price-earnings ratio compares the stock’s current price with its estimated earnings per share over the next 12 months. Again, the lower the better, but we should always compare ourselves to the peer group.
Right now, the median P/E for the consumer staples sector is 21. Both Walmart (+97%) and Costco (+129%) are higher than the sector median.
Now, stocks may seem “expensive” as a result of their higher multiples, but that can also mean that investors are willing to pay a premium because they believe in the company and expect better performance in the future. In this particular case, it is the sheer size and moat that both companies have built that justifies the higher valuations. I mean, you can’t “easily” create a company that is capable of competing with Walmart or Costco, right?
Of course, if you’re looking for a pure value play between the two, Walmart is a better choice with a slightly lower Forward P/E.
Now let’s move on to what you came for: dividends. So far, this is what the image looks like:
Metric
Walmart
costco
Grades
Annual Dividend
$0.94
$5.20
Costco pays a much higher dividend per share, although the stock itself trades at a much higher price.
Dividend yield (forward)
0.75%
0.52%
Walmart offers a slightly higher yield, meaning investors receive more income relative to the stock price.
Dividend payout ratio
35.43%
27.22%
Costco maintains a lower payout ratio, leaving more room to increase dividends in the future.
Years of dividend growth
53 years
20+ years
Walmart is the dividend king, reflecting more than five decades of annual dividend increases.
Overall, Walmart leads in dividend history and yield, while Costco has a slight advantage with its lower dividend payout ratio, giving it more room for increases. Both have strengths that appeal to income investors.
That being said, let’s look at what Wall Street says.
A consensus among 39 analysts rates Walmart stock a “Strong Buy.” The stock also has an upside potential of up to 20% if it hits its high target of $150.
Meanwhile, Costco’s rating from Wall Street is a little more modest, with a consensus of 35 analysts rating the stock a “Moderate Buy.” However, its upside potential is greater, at 31%, if it reaches its high price target of $1,315.
At the end of the day, Walmart and Costco are simply two very strong independent companies with different strengths. The best course of action ultimately depends on your goals and risk tolerance.
If you want a larger, more established company with a longer history, paying dividends and a slightly higher yield, Walmart may be the best choice.
But if you’re looking for growth potential in both stocks and payments, Costco might be a better long-term option.
In short, Walmart may appeal more to income-focused investors, while Costco could appeal to those willing to trade a little performance for efficiency and growth.
As of the date of publication, Rick Orford had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
