Costco Eyes Potential Special Dividend to Boost Shareholder Returns

Costco Wholesale (NASDAQ: COST) hasn't been setting the market on fire lately. The stock is down nearly 7% year to date despite a recent earnings beat that failed to provide any meaningful lift. Still, there could be a silver lining in the form of a special dividend, something Costco has handed out periodically with good effect.

Wall Street is buzzing about the company's substantial cash pile - around $16.2 billion or roughly $36.50 a share. This treasure trove has analysts like Wells Fargo's Edward Kelly betting that a special dividend announcement is likely coming soon. Historically, Costco's special dividends have arrived every few years, typically in December, with past payouts of $10 and $15 per share in 2020 and 2023 respectively.

Looking back even further, the retailer tossed out special dividends in 2012, 2015, and 2017, which suggests a pattern rather than a one-off event. Kelly notes the average interval between such windfalls is about 2.75 years, placing Costco squarely on schedule for another potential payout.

Other analysts agree. Greg Melich from Evercore ISI highlights the "sneaky" potential for a special dividend, noting Costco's cash reserves are now above $17 billion, and it's been two years since the last one. He envisions as much as a $9 billion special payout, which could translate into a roughly $20 per share bonus, representing a more than 2% yield on top of the regular dividend.

Morgan Stanley adds some numbers to the story. Their research finds companies issuing special dividends tend to outperform the market, gaining about 4.1% in the six months after their announcement and 7.8% in the year following. This data might explain why traders keep an eye on Costco's special dividend cycles despite the recent stock lull.

Of course, there's no guarantee Costco will announce this extra payout. For now, shareholders continue to collect the regular quarterly dividend, currently yielding around 0.60%. But with profits steady and a fat balance sheet, the idea of a special dividend is rekindling optimism.

It'll be interesting to see if Costco sticks to its historical timing and drops the special dividend in December again, or if the company decides to shake things up. Either way, this possibility adds a bit of spice to a stock that has been a little dull on the price charts this year.