Amazon shares jumped 9% on Friday after the company's
quarterly revenues were slightly more than analyst expectations.
That was enough to add more than $14 billion to the company's
Last Thursday I wrote an issue of
Income & Prosperity
Will Amazon Ever Make Money?
With the benefit of hindsight, perhaps I shouldn't
criticize a highflying stock like Amazon hours before earnings
But it doesn't mean much that
Amazon (Nasdaq: AMZN)
shares rose on earnings news. The company reported yet another
quarter of losses. Meanwhile, the hype around the company's
earnings simply highlights the potential risks with this
What ensued was a flurry of activity on Wall Street.
Jordan Rohan at Stifel raised his Amazon share price target to
$400 and Aaron Kessler at Raymond James upped his projection to
But I'm still not buying the stock. Despite its
popularity, Amazon is decades away from returning capital to
shareholders through a dividend.
So enough about Amazon ... let's instead turn our attention to
discount retailers that are attractively priced and actually
rewarding their shareholders. Those companies are
Wal-Mart is the world's dominant discount retailer, with more
than 11,000 stores around the world. Since 1945 the company
has built its name on offering the best price to consumers.
With more than two million employees and annual sales of $469
billion, Wal-Mart is a huge company. The company's
commitment to "Always Low Prices" means that profit margins are
tiny. Last year, the company's net profit margin was just
Meanwhile, Costco is a smaller discount retailer that competes
with Wal-Mart's Sam's Club franchise (named after founder Sam
Walton). With 634 locations, the company generated sales of $105
billion last year. Net profit margins were just 1.9% due to the
company's deep discount business model.
Despite the low profit margins, there are two reasons to buy
both Costco and Wal-Mart.
The first reason is the dividends. On the surface, they
don't look like much. Costco currently pays a small 1.1%
dividend, while Wal-Mart yields only 2.5%. Those aren't the types
of dividends that are going to attract income investors.
But it's the
that matters when it comes to these stocks. Since
initiating a dividend in 2004, Costco has increased its quarterly
payments from $0.01 to $0.31. Meanwhile, Wal-Mart has
increased its dividend by 422% over the past decade.
The second reason to like these stocks is the
Costco trades at a premium retailer valuation of 23-times
earnings. That's due to the company's 10% annual growth, which is
unusual for a retailer of its size.
Wal-Mart trades at a multiple of 15-times earnings.
That's a lower PE multiple than the S&P 500 index and
reflects the company's slow growth.
Neither Costco nor Wal-Mart is
based on their growth rates. But compared with Amazon -
trading at over 100-times earnings estimates - these brick and
mortar retailers are a real bargain.
I like that both companies are showing their commitment to
shareholders through regular dividend increases. Wal-Mart,
however, can be a bit polarizing as a result of its efforts to be
the lowest cost retailer.
Costco, on the other hand, is doing the right thing for
customers, employees, and shareholders. Investors have been
attracted to Costco as a result of the strong performance and
growth prospects, and the stock is up 228% over the last
decade. That's more than 3-times the gains for the S&P
I think this stock will continue to beat the market. If
you want to add a solid discount retailer to your investment
portfolio, Costco would be my pick.