Costco Warehouse, ticker symbol COST, is an American multinational big-box retailer that is a membership-only warehouse club. It is a multibillion-dollar company and one of the largest retailers in the world. Costco is publicly traded on the NASDAQ exchange. One of its major competitors, Sam’s Club, is a subsidiary of Walmart; and a smaller competitor is BJ’s Wholesale Club. If you’re interested in adding Costco stock to your portfolio, here are three common steps to help you buy stock.
A financial advisor can help you create a financial plan for your investment needs and goals.
Costco Wholesale: Company Overview
Costco Wholesale, commonly called Costco Warehouse or Costco, was founded in 1983 in Seattle, Washington. It soon expanded with two more warehouse stores in Portland and Spokane. The company went public in 1985. It’s a membership-only warehouse store with three levels of membership: Executive, Business and Individual. As of 2022, Costco has 118.9 million members. The company’s worldwide headquarters are in Issaquah, Wash. Costco has over 570 warehouse stores in the U.S. and Puerto Rico, and more than 300 in 12 foreign countries.
Costco is a very efficient, lean organization with tight control on inventory and warehouse costs. The majority of its products are the Kirkland brand, which is Costco’s private label brand. Most Costco stores carry only around 3,700 products, while a Walmart superstore may have over 100,000 individual products. Costco, however, has a wide assortment of products ranging from food to caskets to fine wine. It also has 22 Business Centers that do not carry consumer products, catering instead to small business operations. The company tries to take advantage of vertical integration to provide synergy, such as its chicken operation, which is in-house and produces the extremely popular rotisserie chicken for the stores. Costco is among the largest retailers in the world for prime beef, fine wine and its rotisserie chicken.
Costco’s Financial Profile
Costco Warehouses is usually considered to be a blue chip company on very firm footing with huge revenues and a healthy stock price. It has a history of continued profitability along with cost control. During these inflationary times, Costco has had to pass some of the increased costs from along to its customers, but a membership renewal rate of more than 91% shows that it has appealed to customers trying to save money during this period of high inflation.
For Q4 of fiscal year 2022, which ended Aug. 28, 2022, sales increased 15.2% and net sales for the full 2022 fiscal year increased by 16%. As long as there is inflationary pressure on prices, Costco and the discount sector can be expected to do well as people look for value. Eventually, growth for both the company and the sector may cool off as inflation subsides. Current assets exceed current liabilities by a reasonable amount for a company in this market sector. Financially, Costco remains liquid without leaving capital idle. Long-term debt is substantial, but the company has enough operating cash to service that debt.
Some analysts think the company is a bit undervalued with some room to grow. As a result, Costco Warehouses has a Buy rating even at the current high share price (PE ratio of 39.75 on Oct. 26, 2022). When evaluating a stock, keep in mind that past performance does not guarantee future results.
How to Buy Costco Warehouse Stock
There are two ways to invest in Costco stock. First, you can establish and fund a brokerage account and invest through either a discount or full-service brokerage. Costco recommends brokers that it prefers and considers to be high quality
Alternatively, Costco has a Direct Stock Purchase Plan (DSPP) that you can use to circumvent a brokerage service. Costco and its transfer agent, Computershare, offers this Investor Services Program to both existing Costco investors and new investors. Costco uses Direct Registration when a stock purchase is made. You will not receive a stock certificate unless you request one. For the DSPP, there are minimum investments and other online fees to consider before deciding on using the DSPP or a brokerage service.
Most importantly, you should research Costco stock prior to purchase to see if it accomplishes your goals for your portfolio, has a risk level you can live with and that you don’t have a similar stock from the same market sector that you already own.
Here are the three common steps to invest in Costco stock:
Step 1: Is the Stock Right for Your Portfolio?
To determine whether to buy Costco stock, there are five factors to consider:
- Where the stock is traded: Costco is traded on the NASDAQ exchange, which makes it a safer bet than if it were traded over-the-counter. Stocks that trade on an exchange must fulfill certain requirements to be listed on the exchange. This makes them safer than stocks traded over-the-counter since many of those requirements do not apply to them.
- Market sector: If you have other discount stores in your portfolio, you may not want to add another one. It would not provide you with diversification and the risk and return profile might be too similar. Choosing a stock from another market sector might be advisable.
- Analyst opinions: When choosing a stock, you want to choose one that is large enough so analysts from well-known companies are evaluating it.
- Market capitalization: A higher market cap may give a stock more credibility since a higher market cap means more money invested in the stock.
- Publicly available financial information: Information such as the company’s annual report or SEC filings, such as the 10K and 10Q, will help you judge its performance over time and the sources from which it earns its money.
Step 2: Decide If You Want to Invest Directly Through Costco or a Broker
There are pros and cons to investing directly in a company like Costco through its Direct Stock Purchase Plan. Investors are required to have minimum balances and investments for both existing shareholders and new shareholders. There are also online investment fees for initial set-up and recurring setup and processing fees depending on how many shares you own. If you want to automatically reinvest the dividends you receive from the stock, there are both initial and recurring setup fees. If you want to reinvest your dividends automatically, you must enroll in the company’s dividend reinvestment plan.
Dividend reinvestment plans (DRIPs) allow investors who buy a company stock to automatically reinvest the dividends paid in fractional shares of common stock. These plans usually have low or no fees and keep investors from spending the dividends. In the case of Costco, their DRIP has a low fee after you own ninety-nine shares of stock.
If you prefer instead to trade common stock through a commission-free online broker, must use a broker with access to the NASDAQ exchange (Costco has a list of recommended brokers). But, if you prefer to get advice about your stock purchases, a full-service broker might be a better option for you. You should note, however, that there are associated costs when you use a full-service broker.
Costco allows the purchase of its common stock in fractional shares. Not all companies do, and not all brokerages trade in fractional shares, so you will have to find a broker that can do so. Costco stock is pricey and fractional shares allows new investors to enter the market at a more affordable price.
Step 3: Purchase Costco Stock
You should now have a trading account open and funded with either Costco’s DSPP or with a brokerage service. If you have done your due diligence, you can purchase the stock up to the amount you have in your trading account. You can place either a market or limit order for Costco. Keep an eye on your stock, particularly at first, to see if it is performing the way you expected. Remember that both factors external to the stock, such as the general state of the economy, as well as factors relevant to the stock itself, can affect its performance.
Common stock is a risky investment and you are always at risk of losing your principal. Therefore, well-established companies often make the safest investments. If you are not a financial professional, consider using a financial analyst who is skilled in evaluating and choosing stocks and developing well-diversified portfolios.
Bottom Line
Costco is an old and established firm in the discount store space. It is one of the largest firms in the world and is the largest in terms of many of the products it carries. It is also an expensive stock. You can own more Costco stock by dollar-cost averaging. This is an investment strategy where you invest in the stock on a regular basis with the same amount of money. When the stock is trading lower, you will be able to buy more, but less when it is trading higher. Also look at the discount store sector in general. Is it doing well and what are its prospects? What about an exit strategy? At what price do you realistically expect to sell the stock?
Tips on Common Stock Investing
- A financial advisor can help you weigh the risks and advantages before investing in a stock for your portfolio. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Do you need some help choosing stocks for your portfolio? If so, take a look at SmartAsset’s asset allocation tool that helps you choose stocks in the proper proportion for your portfolio.
- SmartAsset has developed a step-by-step guide for buying stock for your convenience. It will point you in the right direction and give you valuable information to use in choosing stock for your portfolio.
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