Costco vs. Safeway: Which Stock's Dividend Dominates?
Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two of America's leading grocers will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Founded in 1983, CostcoWholesale is thebiggest wholesale-club operator in the United States and is the seventh-largest retailer in the world. It is also ranked among the top 25 companies on the global Fortune 1000 list. Headquartered in Seattle, the company now operates more than 640 membership-only warehouse stores, mainly under the Costco Wholesale banner, and serves roughly 71 million members in more than 10 countries, including Australia, Canada, Mexico, Taiwan, and the U.K. Costco has a diversified product portfolio of more than 4,000 discounted offerings, ranging from fresh food and pharmaceuticals to liquors, appliances, and tires. Costco has been aggressively expanding into international markets, especially Asian countries, which offer a massive untapped base of potential new members.
Established in 1915, Safeway is one of the largest food and drug retailers in North America. Headquartered in Pleasanton, Calif., the company operates more than 1,400 stores that are mainly situated in the western, midwestern, and mid-Atlantic regions of the U.S. Safeway also owns a 49% stake in Casa Ley, which currently operates more than 190 food and variety stores in Mexico. The company also holds a 73% interest in Blackhawk Network Holdings, but it announced plans to divest its Canadian retail operations for more than $5 billion in 2013.
Trailing-12-month profit margin
TTM free cash flow margin*
5-year total return
Round one: Endurance (dividend-paying streak)
According to Dividata, Costco began quarterly dividend payouts in 2004, and has been paying ever since. On the other hand, Safeway has paid quarterly dividends since 2005. That's close, but Costco takes the endurance crown.
Winner: Costco, 1-0.
Round two: Stability (dividend-raising streak)
According to Dividata, Costco has been increasing dividend payouts at least once every year since 2005, while Safeway began increasing shareholder distributions in 2006. Chalk up another narrow victory for Costco here.
Winner: Costco, 2-0.
Round three: Power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
Winner: Safeway, 1-2.
Round four: Strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.
Winner: Safeway, 2-2.
Round five: Flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
Winner: Safeway, 3-2.
Bonus round: Opportunities and threats
Safeway may have come from behind to win the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
- Costco has been aggressively expanding its geographical presence in Australian markets.
- The company has plans to open a total of 30 new domestic and international locations in 2014.
- It remains unaffected by retail malaise thanks to unmatched customer loyalty.
- Costco continues to keep membership renewal rates at more than 90% in Canada and the U.S.
- Safeway has pushed its O Organics brand at more than 1,600 locations throughout the U.S.
- It has been offering more private-label brands to draw sales from its peers.
- Safeway sold off some Canadian operations to focus on more profitable stores.
- Safeway has been expanding through the apartments-over-stores format in U.S. markets.
- Costco only retained 49.4% of the customers acquired during the 2012 holiday season.
- Amazon.com has been increasing the number of bulk products available at competitive prices.
- Kroger's acquisition of Harris Teeteradded around 212 stores to a major Safeway competitor.
- Kroger has been spreading its geographical presence using the recognized marketplace format.
- Whole Foods Market will expand its healthy food store concept to 1,200 locations in the U.S.
One dividend to rule them all
In this writer's humble opinion, it seems that Costco has a better shot at long-term outperformance, thanks to generally unmatched customer loyalty, which allows it to generate operating profit 12 months in advance through annual membership fees. In addition, Costco continues to add new products in order to provide customers with a pleasant top-tier shopping experience and should gain millions of new members from its expansion into lucrative overseas markets.
By contrast, Safeway has been undergoing extensive restructuring at a time when competition and consolidation in the grocery sector continues to heat up -- the company may well face strong headwinds from Kroger and Whole Foodsas these competitors continue to expand their domestic footprints.
You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
Need a few more ideas for your dividend portfolio?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.
The article Costco vs. Safeway: Which Stock's Dividend Dominates? originally appeared on Fool.com.John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com, Costco Wholesale, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.