Should one consider Buying, Selling, or Holding Costco Shares by 2025?
Costco Wholesale (COST dropping by 0.64%) didn't manage to surpass the $1,000 per share mark by the end of 2024, but it came close. The stock saw a significant 50% increase through mid-December, outpacing the growth of the S&P 500 by double the rate.
The $1,000 mark appears to be within reach, possibly as early as 2025. This is due to Costco's impressive performance in 2024, successfully attracting more customers to both its physical stores and online platform despite rising membership fees and cautious consumer spending habits.
But is Costco a wise investment choice for portfolios in 2025 and beyond? Let's delve deeper.
Invest in it for growth
The best chance for boosted returns for Costco shareholders in 2025 comes if the company can continue to gain market share. It enters the year with strong momentum in this regard. Comparable-store sales increased by 7% during the fiscal first-quarter period ending in late November, as Costco disclosed on Dec. 12. This growth rate was nearly doubled for its e-commerce segment.
These results surpassed competitors such as Target and Walmart, although competition between Costco and Walmart has grown more intense in recent quarters. Walmart's flourishing e-commerce sector has attracted higher-income shoppers, posing a threat to Costco's dominant position in this demographic.
However, Costco has a history of outperforming competitors across various economic growth conditions, from recessions to periods of strong consumer spending. It's likely that 2025 will bring another year of modest market-share gains for Costco.
Keep it for profits and dividends
Costco is less appealing as an investment when considering its profitability and dividend payouts. Its low prices keep it significantly below competitors in terms of gross profit margin, which hovers around 13% of sales. Walmart easily surpasses this figure, and even struggling rival Target has improved its profitability to around 30% of sales in 2024.
Investors should not expect Costco to close this profitability gap anytime soon, either, as management has indicated that it intends to primarily use excess cash to maintain low prices. Costco's dividend policy also suggests limited quarterly cash returns that fall far short of peers. Costco does occasionally issue large, "special dividends," but those looking for a consistent and predictably growing income stream might prefer Walmart stock over Costco at present.
Don't discard Costco stock
The most persuasive reason to sell Costco heading into 2025 is its elevated valuation following two years of more than 30% growth in the S&P 500. Shares are trading at all-time highs, with a price-to-sales ratio of 1.7 and a price-to-earnings ratio of 58, leaving plenty of room for contraction if the market experiences a downturn or Costco experiences operational struggles in 2025.
If the stock's surge has led to an outsized portion of your portfolio, it may be wise to sell a few shares to avoid over-investing in a single stock.
However, Costco has earned its premium over peers by securing a string of market-share victories and constructing a retail-as-a-service business that generates highly stable membership fees. This business model reduces the variability of earnings compared to other retailers, and it's a major reason why the stock has performed so well during the pandemic and its aftermath.
As a result, investors are likely to be happier holding this expensive stock in their portfolio in 2025 and beyond.
Considering the strong market-share gains and impressive performance of Costco in 2024, now might be an optimal time for investors to consider investing further in Costco shares, aiming to capitalize on its potential growth. However, it's essential to keep in mind that Costco's profitability and dividend payouts may not be as attractive compared to competitors, such as Walmart and Target.
Despite its relatively lower profit margins and dividend rate, Costco's elevated valuation following two years of significant market growth might warrant a careful reevaluation of one's investment strategy. Investors should consider diversifying their portfolio by selling a few shares of Costco stock to avoid over-investing in a single stock, while also acknowledging the key factors that have contributed to Costco's success, such as its retail-as-a-service business model and stable membership fees.
