Within the food business, the organic grocery market is one of the fastest-growing segments. Consumer spending on organic food has soared 72% since 2008.
Behind the scenes, Costco (NASDAQ: COST) became was the No. 1 organic food retailer in 2016. It sold more than $4 billion in organic food and products last year.
Bulk food retailing — which is Costco’s core business — is on top. It’s a business model that has thrived in all economic environments. Costco has posted a return that’s more than double the S&P 500 over the last decade. It’s our top organic foods stock.
Innovation and Organic Foods
Costco has proven that it can sell anything at a competitive price, organic foods included. Costco continues to shake up the organic food market, for the better.
Costco is selling organic food so fast that it can’t keep up, so it’s lending money to farmers who need to buy land and equipment. That gives Costco first dibs on produce. It’s also buying up land to manage its own organic farms.
Costco expects its organic food sales to climb 20% this fiscal year. Its stronghold in organics also helps the company grow sales among millennials, getting this massive generation through the doors and in its stores.
And instead of sectioning off organic produce and products like other grocers, Costco keeps organics sprinkled throughout the store. This boosts sales of organics to a broader group of customers.
A Highly Underrated Dividend
As a dividend payer, Costco might be one of the most underrated names in the market. Not only is it the top organic foods stock, the world’s second-largest retailer has a 13-year streak of consecutive annual dividend increases. It pays a 1.1% dividend yield and is only paying out 30% of its earnings via dividends. With its growth opportunities, it could easily speed up its dividend growth.
The other major players in the organic foods market, Whole Foods and Kroger (NYSE: KR) offer higher dividend yields, but they don’t have the same great dividend growth prospects.
Costco has a market capitalization that’s more than double the size of Kroger. And Costco has the size and scale to continue bringing organic foods to the masses.
Costco’s Membership Sales Model
The beauty of Costco is that its membership model helps it remain relatively insulated from companies like Amazon.com (NASDAQ: AMZN) as well as other grocers. Costco wins out on price versus competitors and has the beauty of a recurring revenue in its annual membership fees. And it’s recurring in the truest sense, as it has an average annual renewal rate of nearly 90%.
Costco has built a network of loyal customers. Its membership business brings in over $2.6 billion users across nearly 90 million members. A visible revenue stream that will help keep up its record of consistent dividend increases.
Costco also has growth opportunities, including in international markets. Today Costco gets just 10% of revenues from its international business and has only 200 stores outside the U.S.
For investors looking to play the organic food market, consider Costco the top organic foods stock. It offers one of the most underrated dividends in the market.
When it comes to how Costco stacks up against its competitors, it has superior returns on invested capital and a better balance sheet. This dividend yield might not look like much, but it’s one of the best you’ll find in the retail market.