Demand for precious metals has risen sharply, as investors view hard assets like gold (GCZ24) and silver (SIZ24) as safe havens amid market volatility and potential currency devaluation. Additionally, geopolitical tensions, like the rising aggressions in the Middle East, have further increased demand for traditionally defensive assets. Moreover, against a backdrop of ballooning government debt, the case for investing in precious metals becomes even stronger.
While mining stocks have traditionally benefited during boom times for precious metals, another dividend stock is tapping into the surging retail interest in precious metals - and turning it into revenue. Here's a closer look.
About Costco Stock
Founded in 1976, Costco Wholesale (COST) is a membership-only big-box retail warehouse chain that operates in the U.S. and internationally. It offers various products, including groceries, electronics, household goods, apparel, and more. Costco's business model is based on selling a limited selection of high-quality products at low prices, often below retail market prices.
Valued at a market cap of $394.75 billion, COST stock is up 34.9% on a YTD basis, outperforming both the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX). Notably, the stock also offers a dividend yield of 0.53%, and has been raising dividends consistently for each of the last 19 years. With a conservative payout ratio of 26.88%, there's scope for further growth in these payouts, making COST a solid choice for investors seeking both income and growth.
But let's talk about how is Costco benefiting from higher demand for precious metals.
Costco's Commodity Play
Costco has been selling precious metals to its members since September 2023. The initial product lineup included 1-ounce gold bars from PAMP Suisse and Rand Refinery, which began selling out within hours of listing on the Costco website. On the heels of that success, Costco started selling American Silver Eagles and Canada Maple Leaf silver coins, which likewise sold out within hours.
Now, it has added platinum (PLF25) to its gamut of offerings in the physical precious metals niche. Costco has launched the sale of 1 oz. platinum bars and Canada Maple Leaf platinum coins, both offered at a price tag of $1,089.99.
Wells Fargo weighed in positively on the initiative, with analyst Edward Kelly commenting, "Our work suggests there has been significant interest given COST's aggressive pricing and high level of customer trust. The accelerating frequency of Reddit posts, quick online sell-outs of products, and COST's robust monthly e-commerce sales suggests a sharp uptick in momentum since the launch."
The firm sees physical precious metals adding 1% to comparable sales and 3% to general merchandise sales for Costco, with minimal impact expected on profits.
Costco's commodities play is opportune, and is expected to serve the company well with long-term visibility of demand for precious metals. While Goldman Sachs is predicting gold to touch record highs in 2025, silver is set to play a crucial role in the clean energy transition. Meanwhile, platinum is expected to remain undersupplied till 2028.
The well-timed entry into the physical precious metals market is one reason why Costco stock looks like an intriguing investment now. However, the wider Wall Street community is confident about the company's broader prospects, as well. Let's find out why.
COST's Robust Fundamentals
Costco has consistently increased its revenue and earnings over the long term. In the last 10 years, the company grew its revenue and earnings at CAGRs of 8.49% and 13.44%, respectively.
COST's results for the latest quarter continued this trend, with both revenue and earnings increasing on a YoY basis during the fiscal fourth quarter. While revenues for Q4 came in at a staggering $79.7 billion (vs $78.9 billion in Q4 2023), earnings per share (EPS) improved by 8.9% to $5.29. On an adjusted basis, EPS of $5.15 surpassed the consensus estimate of $5.05.
Overall comparable sales rose by 5.4% in the quarter, with the same metric for e-commerce sales showing comparatively higher growth of 18.9%. Membership renewal rates stayed strong as well, at 90.5% globally and 92.9% in Canada and the U.S. Further, the company expanded its number of warehouses to 890 at the end of the quarter, up from 861 in the year-ago period.
Costco reported net cash from operating activities of $11.3 billion for fiscal 2024, up 2.4% from the previous year. Overall, Costco closed the quarter with a substantial cash balance of $9.9 billion, dwarfing its short-term debt levels of $103 million.
Growth Drivers for Costco
The company’s bulk-buying model continues to attract value-conscious shoppers, especially amid economic challenges, helping it to build a loyal customer base of around 75 million with a renewal rate exceeding 90%.
In the most recent quarter, Costco achieved a 9.6% year-over-year increase in membership, signaling that more consumers are recognizing the cost savings and quality of the merchandise. This membership growth is expected to boost traffic in their retail stores - and with the recent 8% hike in membership fees as of Sept. 1, Costco stands to see significant contributions to its operating profits in FY25. This fee increase will further strengthen its already robust membership-based revenue stream.
Additionally, Costco introduced a new "buy online, pick up" feature for TVs in the U.S., designed to enhance customer convenience and potentially drive in-store purchases when customers collect their orders.
How Do Analysts Rate COST Stock?
Overall, analysts have assigned a consensus rating of “Moderate Buy” for COST stock, with a mean target price of $942.97. This indicates an upside potential of about 4.8% from current levels.
Out of 31 analysts covering the stock, 17 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 11 have a “Hold” rating.
