Shopping habits can tell a lot about consumers and retailers. Some people prefer stores where they can get everything they need – in one trip. Others are happy to buy in bulk if it means getting a better deal.
This demographic perfectly captures the difference between Walmart shoppers and Costco shoppers. Both companies dominate the retail industry, yet they take very different approaches to winning over customers.
Naturally, this gives investors something to think about. If these two retail companies run such different playbooks, which stock really deserves a place in the 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 a way, we have Walmartthe world’s largest retailer known for everyday low prices. With thousands of stores worldwide, Walmart has become a one-stop shop for everything from groceries and home essentials to clothing and electronics. Walmart is also one of the largest companies in the world, with sales of nearly $1 trillion.
Today, it trades around $125 per share, which is up nearly 12% year-to-date.
In the second way, we have Costco. It’s also a one-stop shop that offers pretty much everything under the sun, including groceries, home essentials, and electronics — and more. What sets Costco apart is its membership model, which translates into a very loyal customer following.
With a market cap of $440 billion, Costco is less than half the size of Walmart, but that alone doesn’t make it less of an investment.
Right now, COST stock is trading around $1,003 per share, which is up 16% year-to-date.
Now, let’s see how the business models of both companies.
Walmart operates on a high-volume, low-price model by investing in its large product portfolio.
The company keeps prices low on thousands of items as a result of a highly efficient supply chain. Think of it like a store that sells little, but makes money by selling a lot. Buying in bulk means better negotiating power with your suppliers. It also keeps costs down for its customers.
Meanwhile, Costco operates under a membership-based warehouse model that has fewer product options than Walmart.
The company deliberately keeps its product selection limited and focuses on selling items in bulk. Looking for a pound of sugar? At Costco, you’ll be buying more by the pound. But you will get a great price.
Another difference is that Costco makes money through membership fees, which bring in a steady stream of revenue and also help keep product markups relatively low.
In short, Walmart depends on scale and convenience, while Costco relies on great prices and member loyalty for its business strength.
If we compare the last quarterly financials of each company:
Matric
Walmart
Costco
sale
179.5 billion dollars
69.6 billion dollars
net income
6.1 billion dollars
2 billion dollars
Price/Sales
1.40
1.61
Price/Earnings (advance)
43.28
49.16
Right off the bat, we can see that Walmart has significantly higher earnings than Costco. Its net income is also higher at $6.1 billion versus Costco’s $2 billion.
Now, to the values. The price-to-sales (P/S) ratio compares a stock’s current market price to its earnings per share to determine how expensive it is. The lower the P/S, the better.
However, “low” is a subjective value here. To get a better idea of the company’s current value, we need to look at the sector median.
The consumer staples sector has an average price-to-sales ratio of 1.04. This means that both companies are trading slightly above the sector median.
On the other hand, the forward price-to-earnings P/E ratio compares the stock’s current price to its expected earnings per share over the next 12 months. Again, lower is better, but we should always compare with the peer group.
Currently, the median P/E of the Consumer Staples sector is 21. Both Walmart (+97%) and Costco (+129%) are above the sector median.
Now, stocks may look “expensive” as a result of their high multiples, but this could also mean that investors are willing to pay a premium because they believe in the company and they expect good performance in the future. In this particular case, it is the considerable size and depth that both companies have built that justify the high valuations. I mean, one can’t “easily” build a company that competes with Walmart or Costco, can they?
Of course, if you’re looking for a pure value play between the two, Walmart is the better choice at a slightly lower forward P/E.
Now, let’s get to what you came for: shares. So far, here’s what the image looks like:
Matric
Walmart
Costco
notes
Annual dividend
$0.94
$5.20
Costco pays a huge dividend per share, even though the stock itself trades at a very high price.
Dividend yield (advance)
0.75%
0.52%
Walmart offers a slightly higher yield, meaning investors are getting more income in line with the stock price.
Dividend payout ratio
35.43%
27.22%
Costco maintains a low payout ratio, leaving more room to grow the dividend in the future.
Dividend Growth Years
53 years
20+ years
Walmart is the dividend king, reflecting more than five decades of annual dividend increases.
Overall, Walmart is the leader in dividend history and yield, while Costco has some upside with its low dividend payout ratio, giving it plenty of room for growth. Both have strengths that appeal to income investors.
With that, let’s see what Wall Street is saying.
A consensus among 39 analysts rates Walmart stock a “strong buy.” The stock also has a potential upside of 20% if it reaches its top target of $150.
Meanwhile, Wall Street’s rating of Costco is a bit more moderate, with a consensus of 35 analysts rating the stock a “moderate buy.” However, its potential upside is higher at 31% if it reaches the high target price of $1,315.
At the end of the day, Walmart and Costco are simply two very strong independent companies with different strengths. The best stock ultimately depends on your goals and risk tolerance.
If you want a large, more established company with a long track record, paying dividends, and a slightly higher yield, Walmart may be better.
But if you’re looking for growth potential in the stock and dividends, Costco may be a better choice for the long term.
In short, Walmart may appeal more to income-focused investors, while Costco may attract those willing to trade some yield for efficiency and growth.
As of the date of publication, Rick Orford had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
