Stocks are moving higher today after an upward revision to third-quarter GDP and some positive comments on cooling inflation from Atlanta Fed President Raphael Bostic, which suggests we could see a more accommodative interest rate environment at some point in 2024. That said, with the OECD forecasting slower economic growth for both the U.S. and China next year, strapped consumers and investors alike may want to take a fresh look at discount retailers.
In particular, the two top retail giants in the country - Costco (COST) and Walmart (WMT) - look compelling against the current economic backdrop, due in part to their sheer scale and sourcing capabilities. Plus, both retailers have a strong history of paying regular dividends backed by strong earnings, which makes them worthwhile income picks in any environment.
For investors looking to add some exposure to quality retail names, here's a comparison of COST vs. WMT to see which dividend stock is a better value - with more upside potential - at current levels.
COST vs. WMT on Quarterly Earnings
Both retailers posted a strong set of numbers for their latest quarterly results.
For Q3 2024, Walmart's revenues increased by 5.2% from the previous year to $160.8 billion, which comfortably topped consensus estimates, while EPS improved by 2% to $1.53 in the same period. Free cash flow improved 19.3% year-over-year to $4.3 billion. WMT also raised its FY 2024 earnings and revenue guidance, although management's EPS range of $6.40 to $6.48 fell slightly short of Wall Street's $6.50 estimate.
Longer term, Walmart's revenue and EPS have expanded at a 5-year CAGR of 4.53% and 28.05%, respectively.
In its fiscal Q4, Costco's revenues of $78.9 billion were up 9.5% from the year-ago period, while EPS rose 15.7% to $4.86. Both figures beat Wall Street's consensus estimates. Costco's liquidity position also remained solid, as the company closed the year with a cash and cash equivalents balance of $13.7 billion (up 34.3% YoY), well above its long-term debt levels of $5.4 billion (down 17.1% YoY).
Over the past five years, Costco has grown revenues and EPS at a CAGR of 11.34% and 14.84%, respectively.
Stock Price Performance and Dividend Yield
In terms of share price performance in 2023, Walmart has gained less than 10% on a YTD basis, while Costco has rallied 30% over the same period. For comparison, the S&P 500 Index ($SPX) is up about 19%.
While it's underperformed the broader market somewhat, Walmart is now trading at a more attractive valuation than Costco, based on some key metrics. On the basis of forward price/earnings, Walmart is priced at 24.5, compared to Costco's 37.9.
Likewise, WMT is also more attractively valued on the basis of forward price/sales (WMT: 0.67 vs. COST: 1.04) and price/cash flow (WMT: 14.69 vs. COST: 27.21).
Walmart offers a dividend yield of 1.43%, backed by five decades of consecutive growth. That establishes WMT as a Dividend King, and a top choice for income investors.
The dividend yield for COST is 0.67%, which falls below the sector median - but that yield is backed by nearly 20 years of consecutive increases, putting the stock on pace for Dividend Aristocrat status before the end of the decade. Plus, the shareholder payout is growing faster than the norm; the CAGR for Costco's dividend hovers in the 12% range.
Future Growth Drivers
Notably, in fiscal Q2 of this year, Walmart's online sales rose sharply compared to a decline reported by its competitors Macy's (M) and Target (TGT). The Walmart+ subscription service is competing with Amazon (AMZN) in the online delivery space, and - with its subscription price of $98/year - at a lower price point than Prime.
Another growth driver for Walmart will be its strong presence in India through Flipkart, an online e-commerce platform in which it acquired a 77% stake for $16 billion in 2018 (now up to 80%). Not only is Flipkart one of the biggest online retailers in India, but Myntra (a Flipkart company) is also India's largest e-commerce platform for fashion and lifestyle products. This leaves Walmart well-positioned to benefit from the critical Indian e-commerce market.
Meanwhile, with limited or no presence in rapidly growing consumer markets such as China (5 warehouses) and India (no warehouses), the headroom for growth remains substantial for Costco. Another growth driver for Costco remains its very popular membership program, which has 71 million households and 127.9 million total cardholders at a renewal rate of about 92.7%. That translates into revenue generation of about $4.6 billion in membership fees each year. With signs of an expected hike in membership fees, this can be a sustainable and solid growth driver for Costco.
Analysts Project More Upside for Walmart
Overall, analysts are bullish about both Walmart and Costco - but slightly more so when it comes to Walmart.
Analysts have a “Strong Buy” rating for Walmart with a mean target price of $179.56. This denotes an upside potential of roughly 15% from current levels. Out of 30 analysts covering the stock, 21 have a “Strong Buy” rating, four have a “Moderate Buy” rating, and five have a “Hold” rating.
Similarly, for Costco, analysts have a consensus “Strong Buy” rating. Out of 28 analysts covering the stock, 19 have a “Strong Buy” rating, three have a “Moderate Buy” rating, and six have a “Hold” rating.
However, the mean target price for COST is $599.96 - signaling an expected upside potential of less than 2% from current levels.
