Costco to Gain on Tax Benefits: Wells Fargo

Membership-only warehouse club Costco Wholesale Corp. (COST) has seen its shares gain 6.6% over the most recent five-day period, most recently boosted by a bullish note from a team of analysts on the Street who expected the stock to outperform this year on larger-than-expected capital return to shareholders.

Analysts at Wells Fargo lifted their rating on shares of the Issaquah, Washington-based retail giant from market perform to outperform on Monday, highlighting upside from the GOP tax overhaul passed in December, which slashed the corporate tax rate from 35% to 21% and incentivized billions of dollars in overseas cash repatriation. 

Special Dividend Coming Soon?

In a note to clients Monday, Wells Fargo analyst Edward Kelly made the case for Costco to beat consensus expectations as it successfully navigates rising retail cost pressures. Despite difficult comparisons and a challenging retail space, disrupted by the entrance of Amazon.com Inc. (AMZN) with its $13.7 billion Whole Foods Market acquisition in August, Kelly expects the company to maintain "strong comp momentum" and "deliver improved membership trends." 

"The potential for the declaration of a special dividend sooner than expected could represent another catalyst for the stock," he wrote. 

Kelly noted that the wholesale retailer has issued special dividends between 4% to 7% on its stock price every two to three years since 2012. The most recent dividend was paid in May of last year, according to Wells Fargo. Yet as Costco's cash position rises faster than previous years due to Trump tax cuts, and as the company benefits from strong underlying cash flow, the analyst sees potential for it to accelerate the timeline, given an "estimate of a 14% free cash flow (FCF) benefit."

"We expect this combination to drive cash levels near $7.5 [billion] by the end of the fiscal year, which is roughly in-line with the level achieved when the 2015 payment was made," wrote Kelly.

Kelly foresees COST gaining 12% over 12 months to reach $220. Trading up about 1% on Tuesday morning at $196.34 COST reflects a 5.2% gain year-to-date (YTD) and a 20.3% increase over the most recent 12 months, compared to the broader S&P 500's 1% return and 15% growth over the same respective periods. (See also: Costco Earnings Dip a Chance to Buy: Analysts.)