Many investors don't think about Costco Wholesale's (NASDAQ: COST) dividends. It's long been a growth stock that has appreciated over 585% during the last 10 years (ended Nov. 7). During this span, the S&P 500 gained about 195%.
However, the company has been making payouts for more than 20 years, and the board of directors has a history of increasing them annually. Hence, it's important to consider how much it will shell out next year, and whether it can afford the payments.
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Doing the math
Costco declared $8.6 billion in dividends during its latest fiscal year, which ended on Sept. 1. However, this included an outsized $6.7 billion special dividend ($15 per share) that it paid in January. Typically, Costco pays special dividends every few years, so that's not likely to repeat next year.
As of Oct. 1, Costco had about 443.1 million shares. It currently pays a quarterly dividend of $1.16 a share. Multiplying these two factors equals about $2.1 billion. However, since the board of directors has a history of increasing dividends in May, that figure will undoubtedly be higher.
Last year, Costco increased the payment by 13.7%. Assuming a 10% raise, the new quarterly payout would grow to $1.28. Based on this, the company's payouts would total about $2.2 billion.
Costco generates plenty of free cash flow (FCF) to cover these payments. Last year's FCF was $6.6 billion.
While you can certainly find stocks with a higher dividend yield than Costco's 0.5%, it's important to remember that this is only a small component of your potential total return. Dividend-seeking investors can also await the large special dividend that Costco may again pay down the road.
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Lawrence Rothman, CFA has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
