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It’s a special time to buy into Costco

White truck driving by entrance facade of Costco Wholesale storefront. It is the largest membership-only warehouse club in USA, sunny summer cloud blue sky

Costco Wholesale Corporation (NASDAQ: COST) is not a cheap stock, and it has been trending at all-time highs, begging the question: How high can it go?

The Q1 results, cash flow, balance sheet and the special dividend it allows suggest higher, much higher. While it is the premium stock in retail and membership clubs, it is also the premium producer of cash flow and free cash flow worth every penny you pay.

Costco has been building a tidy hoard of cash for the last two years since it announced the last special dividend in Q4 2021. This time, the payment is worth $15 per share to investors or more than 2.25%, with shares trading near $650. Because the ex-dividend data isn't until December 27, the stock will likely move up between now and then and could easily reach that level. 

Fifteen dollars per share is a hefty sum for any business but well within Costco's ability to pay. The better news is that the $17 billion in cash sitting on the books is sufficient to cover the $6.7 billion special payment and leaves the company in a solid financial position. There will likely be another special payment in a few years. 

This year's cash pile is up 24% compared to last year, with persistent operational strength suggesting another year of robust cash flow in 2024. At this pace, the company is on track to hit similar cash levels within three years. 

Costco has a solid quarter, margin shines

Costco had a solid quarter, with revenue growing 6.2% to $57.8 billion. The only bad news is that revenue aligns with the expectations. Among the offsetting factors are a wider-than-expected margin and membership growth. Comps were good at 3.9% adjusted, with strength in the U.S. and digital sales. Digital is one area of note, growing by 6.1% adjusted and back to growth. 

Membership fees, a forward indicator of sales, grew by 8% with no indication of fee hikes in the mix. The company has hinted that fee hikes could come but has yet to say when or if it is a sure thing. Because the company continues to show strength and doesn't need the fee lift to sustain cash flow, dividends or special payments, it could be a PR move and best left for some other time. 

The margin news is favorable to shareholders. The company widened the margin at the gross and operating levels, resulting in a 16% increase in net income and earnings. Earnings of $3.58 also beat the consensus by 16 cents and may lead to upward revisions for the 2024 outlook. As it is, analysts expect Costco to grow revenue by roughly 6.5% and earnings by 9.5%. 

Read more: Costco stock springing back to life

The analysts support Costco

The analysts are bullish on Costco stock and a driver of the uptrend in share prices. The 25 analysts with ratings tracked by have it pegged at "moderate buy" with a target up compared to last month, last quarter and last year, with new targets already showing up after the Q4 release. The first to appear is a price target increase from Telsey Advisory Group to $700. That is the new high price target and implies another 7.75% upside for this market. 

The price action in Costco is up following the Q4 news and setting new highs. The move is gaining momentum, so upward price action should be expected, provided this week's candle closes at or near the session's high. In that event, the next few weeks should see Costco continue to drift upward with the aid of analysts' sentiment. 

Learn more: Don't rush to buy Costco on earnings strength 

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