The race to develop and commercialize effective weight loss drugs has been heating up in 2024. Eli Lilly's (LLY) Mounjaro and Novo Nordisk's (NVO) Wegovy, part of the new GLP-1 drug class, have been making major waves by helping people shed up to 20% of their body weight, on average.
With obesity among U.S. adults trending steadily higher, it's no surprise that analysts think the weight-loss drug market could balloon to $50 billion in annual sales by 2030. That's a massive opportunity.
Costco Wholesale (COST), always one to spot a hot trend - remember those gold bars? - decided to get in on Wall Street's latest diet fad this month. The warehouse club giant teamed up with telehealth provider Sesame to launch its own weight-loss program for members. For $179 every quarter, subscribers get virtual doc consultations, plus access to prescriptions for heavy-hitter weight-loss drugs, like Ozempic and Wegovy, if the clinician thinks it's appropriate.
The retail giant's move into the weight-loss drug arena opens up an interesting new area of growth - particularly for a stock that's well on its way to Dividend Aristocrat status. Costco has raised its dividend for 19 straight years, meaning it should join the elite club of Dividend Aristocrats - formally, S&P 500 Index ($SPX) components who have paid and raised dividends for 25 uninterrupted years - by the end of this decade.
As Costco continues to innovate and expand its services, here's a closer look at this growth stock for income investors.
Meet Costco Wholesale
With an extensive footprint of over 600 locations across the U.S., plus a significant global presence, Costco Wholesale (COST) has solidified its position as a leading player in the bulk-buying market. The company's ability to leverage its massive purchasing power and streamlined operations has allowed it to deliver exceptional value to its members, fostering unwavering loyalty and driving its continued success.
COST shares have performed respectably well in the current bull market, up more than 8% YTD, and boasting a 52-week return of 43.5%.
This price action easily outperforms Costco's closest rivals, Walmart (WMT) and BJ's Wholesale (BJ). That said, the stock's outperformance has also left COST more richly valued compared to its peers, at 1.23x forward sales and 44x forward earnings.
In its latest earnings report, COST banked an adjusted profit of $3.71 per share for Q2 of 2024, which surpassed Wall Street's forecast. Revenue of $58.44 billion wasn't quite as robust as expected - but crucially, Costco beat comparable sales expectations across the board for the key holiday quarter, and membership fee income of $1.11 billion also edged past the consensus.
For the full fiscal year, analysts expect Costco to expand its bottom line by 7.6%, with continued EPS growth of 9.4% in fiscal 2025.
Costco's Reliable Dividend
Costco has a solid track record of giving back to its shareholders, showing off its financial muscle and smart expense management with a steady dividend policy.
Right now, the company pays $1.02 per share every quarter, which results in a forward yield of 0.58% at current levels. The payout ratio is a conservative 27.06%, which means they're saving a good chunk of their earnings for future growth - but still making sure investors get a consistent piece of the pie.
And “consistent” is the keyword. COST has a 19-year track record of hiking dividends, and seems committed to returning value to shareholders via these payouts.
But Costco isn't closing the door on its growth era just yet. With plans to open 31 new stores in 2024, including expanding in the U.S. and China, Costco is on the move. They're also experimenting with a mega-warehouse concept that blends in-store shopping with online orders, aiming to grab a bigger slice of the market and pump up sales. It's clear Costco is thinking big and aiming to keep its growth game strong.
What Do Analysts Expect for Costco?
When it comes to what analysts think of Costco's stock, they're pretty upbeat - the consensus rating is a “Strong Buy,” upwardly revised from “Moderate Buy" earlier this year. Out of 29 analysts, 19 are all in with a “Strong Buy,” rating, 3 are leaning towards a “Moderate Buy,” and 7 are playing it cool with a “Hold.” So, it's safe to say there's a fair bit of optimism floating around.
The average price target for Costco's stock is $774.58. That's about 8.5% north of Friday's close, although the most bullish forecast calls for a rally up to $905 - implying expected upside of 26.8%.
Is Costco Stock a Buy?
In a nutshell, Costco's savvy move into subscription-driven weight-loss revenue, combined with its strong earnings base and dedication to rewarding investors, makes it a hot pick for just about any investor. With analysts increasingly optimistic about the stock, Costco offers an appealing blend of growth and passive income that's worth checking out this April.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
