Costco: A socially responsible buy

While the big-box discounter is not a deeply discounted stock, it has goodness at its core.

By Motley Fool Pick of the Day Dec 17, 2010 9:09AM

Green investing © Bob Jacobson/CorbisFool analyst Alyce Lomax believes it's perfectly possible to aim for above-average returns and social dividends when investing. If you agree, you might want to follow her socially responsible portfolio.

 

Rex Moore, Motley Fool Top Stocks editor

 

Believe it or not, a warehouse retailer with fluorescent lights and concrete floors has social responsibility at its heart. This month's pick for my socially responsible portfolio is Costco (COST).

 

The business
Costco sells bulk goods for discount prices in a series of gigantic warehouses. It's not the only company with this business model. Rivals include Wal-Mart's (WMT) Sam's Club and BJ's Wholesale (BJ).

 

However, Costco has always enjoyed a touch of a higher-end cachet. It sells a smattering of luxury goods such as jewelry and branded clothing dirt-cheap, and part of its major allure is the "treasure hunt" principle. If shoppers see something special and don't buy it on the spot, the next time they come, it will likely be gone. This retailer also attracts a more affluent demographic than many discount retailers. Many of its clientele are small business owners, and Costco charges an annual fee for membership in this "club" of cost savings.

 

Costco's popularity is reflected in its solid profitability. Over the past four quarters, earnings increased 20%, while sales increased 9.1%. Same-store sales ticked up an impressive 7%. It's also got a clean balance sheet, with $4.7 billion in cash and a very reasonable total debt-to-capital ratio of 17.6%.

 

Why I'm buying
Beyond the giant rafts of toilet paper and bulk boxes of granola bars, Costco boasts several elements that socially responsible investors will welcome.

 

Costco is well known for resisting Wall Street pressure to drive more profitability by cutting employee health care and other costs, even when many other retailers have been stingy about such "expensive" benefits. 

 

Along those lines, Costco CEO Jim Sinegal has stood strong for building the kind of long-term business that cares about communities and workers. In 2008, he told Fast Company: "We're trying to build a company that's going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security."

 

In fact, Costco pays its workers more than most retailers. Last July, Bloomberg reported on rival Wal-Mart's well-known labor issues, noting that the Bureau of Labor Statistics says U.S. retail workers overall take home an average of $11.84 per hour. By comparison, Costco pays its employees about $11.00 per hour to start, and its average hourly pay for its American employees is $19.76.

 

Sinegal is a down-to-earth leader who comes across as more passionate about building a solid business than lining his own pocket at shareholder and worker expense. He happens to be a modestly compensated American CEO; his base salary of $350,000 has remained the same for years.

 

Last but not least, providing low prices for shoppers is arguably a socially responsible endeavor, especially when many of those shoppers are small businesses. Those businesses are the lifeblood of our economic engine, and Costco's low prices help them in their ongoing struggle to survive and thrive.

 

Costco is being built for the long haul, with management that seems driven to do the right thing. It's perfect for this portfolio.

 

And now, the risks
Sorry, folks: Costco is a discounter, but it's not a deeply discounted stock. However, I consider it a premium company that's worth a premium share price, if you're willing to hold for the long term. It trades at 24 times trailing earnings, far pricier than major rivals such as Wal-Mart and Target (TGT), which you can get for 13.5 and 15.5 times earnings, respectively.

 

Providing discounted goods to consumers is a highly competitive retail segment. In some ways, Costco competes with everybody. On the low end, it contends with Wal-Mart, Target and BJ's, along with the many other retailers also offering cut-rate goods for bargain-hunting consumers, like Big Lots (BIG) and Family Dollar (FDO). On the high end, the same affluent shoppers who troll its aisles for luxury merchandise could easily be lured away to more prestigious stores.

 

Further, if a bad economy or excessive regulation drives too many small businesses into the ground, or stunts entrepreneurs' ability to start new ones, the lack of small-business customers could hurt Costco.

 

My Foolish bottom line
Costco is a gold standard among retailers and a wonderful stock to own for the long, long haul. Its many policies directed at fostering healthy communities in which to live and work imply that this company is not only positioned well for the future but will also face far fewer growth hurdles in the coming decades.

 

Don't sweat the price -- celebrate the philosophy. Costco has bulk social responsibility at its core, and buying in now is a sound strategy.

 

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks.

 

Alyce Lomax does not own shares of any of the companies mentioned. Costco and Wal-Mart are Motley Fool Inside Value picks. Costco is a Motley Fool Stock Advisor choice. Wal-Mart is a Motley Fool Global Gains selection. The Fool owns shares of Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

 

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