Stocks are up today on upward revisions to third-quarter GDP and positive comments from Atlanta Fed President Rafael Bostic on reining in inflation, which could be more easing at some point in 2024. This suggests the possibility of a similar interest rate environment. With the OECD predicting economic growth will slow in both the U.S. and China next year, distressed consumers and investors alike may want to take another look at discount retailers.
In particular, two of the nation’s largest retailers, Costco (COST) and Walmart (WMT), look attractive in the current economic climate, in part because of their size and sourcing capabilities. What’s more, both retailers have a track record of paying regular dividends on the back of strong earnings, making them worth picking as income sources in any environment.
For investors looking to add exposure to quality retail names, compare COST and WMT to see which dividend stock has better value and more upside potential at current levels. please.
Comparison of COST and WMT in quarterly revenue
Both retailers reported strong numbers in their latest quarterly results.
Walmart’s revenue for the third quarter of 2024 rose 5.2% year-over-year to $160.8 billion, comfortably beating consensus estimates, and EPS improved 2% to $1.53 in the same period. Free cash flow increased 19.3% year-on-year to $4.3 billion. WMT also raised its earnings and revenue guidance for fiscal 2024, but management’s EPS range was $6.40 to $6.48, slightly below Wall Street’s expectations of $6.50.
Over the long term, Walmart’s revenue and EPS grew at a five-year CAGR of 4.53% and 28.05%, respectively.
Costco’s sales for the fourth fiscal year were $78.9 billion, an increase of 9.5% from the same period last year, and EPS was $4.86, an increase of 15.7%. Both numbers exceeded Wall Street consensus expectations. Costco’s liquidity position is also strong, with the company ending the year with cash and cash equivalents of $13.7 billion (up 34.3% year-over-year), significantly lowering its long-term debt level of $5.4 billion (down 17.1% year-over-year). exceeded.
Over the past five years, Costco has grown its revenue and EPS at a CAGR of 11.34% and 14.84%, respectively.
Stock price performance and dividend yield
In terms of stock performance in 2023, Walmart is up less than 10% year-to-date, while Costco is up 30% over the same period. For comparison, the S&P 500 Index ($SPX) is up about 19%.
Although Walmart is slightly underperforming the broader market, it trades at a more attractive valuation than Costco based on several key metrics. Based on forward price-to-earnings ratios, Walmart’s stock trades at 24.5x, compared to Costco’s 37.9x.
Similarly, WMT is valued more attractively based on forward price/sales (WMT: 0.67 vs. COST: 1.04) and price/cash flow (WMT: 14.69 vs. COST: 27.21).
Walmart’s dividend yield is 1.43%, backed by 50 years of continuous growth. This has cemented WMT’s status as a dividend king, making it a top choice for income investors.
COST’s dividend yield of 0.67% is below the sector median, but the yield is backed by nearly two decades of consecutive gains, and the stock is on pace to achieve Dividend Aristocrat status before the end of the decade. has reached. Additionally, shareholder dividends are increasing faster than usual. His CAGR for Costco’s dividends is hovering around his 12% range.
Future growth drivers
Notably, in the second quarter of this year’s fiscal year, Walmart’s online sales increased significantly compared to declines reported by competitors Macy’s (M) and Target (TGT). The Walmart+ subscription service competes with Amazon (AMZN) in the online shipping space, and its subscription prices are $98/year – lower price than Prime.
Another growth driver for Walmart will be its strong presence in India through online e-commerce platform Flipkart, which acquired a 77% stake in 2018 for $16 billion (now up to 80%). Flipkart is not only one of the largest online retailers in India, but also Myntra (Flipkart company) India’s largest e-commerce platform for fashion and lifestyle products. This puts Walmart in a good position to benefit from important challenges. Indian e-commerce market.
Meanwhile, Costco still has a lot of room to grow, as it has limited or no presence in fast-growing consumer markets such as China (5 warehouses) and India (no warehouses). Another growth driver for Costco is its membership program, which remains very popular. 71 million households, total card holders 127.9 million, renewal rate approximately 92.7%. This would generate approximately $4.6 billion in revenue each year in membership fees. With expected increases in membership fees, this could be a sustainable and reliable growth driver for Costco.
Analysts expect further upside for Walmart
Overall, analysts are bullish on both Walmart and Costco, but slightly more bullish on Walmart.
Analysts rate Walmart a Strong Buy, with an average price target of $179.56. This suggests around 15% upside potential from current levels. Of the 30 analysts covering the stock, 21 have a “strong buy” rating, four have a “fair buy” rating, and five have a “hold” rating.
Similarly, analysts’ consensus rating for Costco is a “strong buy.” Of the 28 analysts covering the stock, 19 have a “strong buy” rating, three have a “fair buy” rating, and six have a “hold” rating.
However, COST’s average target price is $599.96, indicating expected upside potential of less than 2% from current levels.
On the date of publication, Pathikrit Bose did not have (directly or indirectly) any positions in the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.