An Early Christmas Gift from Costco

Focus: STOCKS

Jim Jubak Image Jim Jubak Founder and Editor, JubakPicks.com

Costco shares popped when the company announced a special $7 dividend, but how much of the gains will survive the December 10 record date remains to be seen, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Shares of Costco Wholesale (COST) are up 5.66%—$5.46 a share—as of 1:30 pm New York time Wednesday on news that the company will pay a special dividend of $7 a share on December 18 to shareholders of record on December 10.

(Oh, and by the way, the company also announced that US comparable store sales for November climbed by 6%. Total company sales, after subtracting for currency effects, were up 5% In November from November 2011. And, by the way by the way, the company lowered revenue guidance for the first quarter of its 2013 year—the quarter that ends on November 30 and that will be reported on December 12—to $23.21 billion from the Wall Street consensus of $23.43 billion.)

Financial theory as taught to me in business school says that a special cash dividend like this should have a minimal effect on a company’s share price in the long run. If it is simply shifting cash from the company’s balance sheet to the pockets of investors, it’s only a positive if investors think they can invest that cash for higher returns than the company (a dubious proposition in the case of Costco) or if they have some extraneous reason to like cash distributed now. That second reason—cash now avoids the uncertainty of tax increases on dividends in 2013—has some value to short-term investors, but if you own Costco because of the company’s ability to grow its business, the value seems small at best.

In other words, the stock should move up in the short-term as investors buy to capture the $7 special dividend—after all earning 7% or so for owning the shares for less than three weeks would be quite a nice rate of return—but then the shares should move back to their pre-dividend-announcement level or lower since the company has distributed part of its assets to shareholders.

But this gets a little more complicated because it looks like Costco intends to borrow the $3 billion so that it can distribute $3 billion to investors.