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Why Costco won't be handing out $10 billion to investors as many have speculated

Brian Sozzi
·Editor-at-Large

The Costco special dividend and the Lochness Monster have one thing in common: They have both been heavily speculated about, but never seen in person.

As for those who can care less about the Lochness Monster’s whereabouts and more on Costco (COST), chatter about the long sought after special dividend from the cash rich retailer may need to finally be put to bed. Talk of a special dividend on Wall Street from Costco has finally died down in large part because of its potential $10 billion price tag, says Guggenheim Securities analyst John Heinbockel.

“For much of the past 18 months, there has been considerable discussion among investors as to the timing and magnitude of a potential special dividend. Such talk has, rightfully, died down. We believe this reflects the shares’ strong performance and the considerable cost of a “material” special dividend,” Heinbockel notes.

In this Tuesday, March 5, 2013, photo,  shoppers push their carts at the Costco store in Nashua, N.H. Costco's fiscal second-quarter net income climbed 39 percent as it pulled in more money from membership fees, sales improved and it recorded a large tax benefit. The wholesale club operator earned $547 million, or $1.24 per share, for the period ended Feb. 17. That compares with $394 million, or 90 cents per share, a year earlier.   (AP Photo/Charles Krupa)
Shoppers push their carts at the Costco store in Nashua, N.H. (AP Photo/Charles Krupa)

The analyst, who rates Costco’s stock a Neutral ahead of its Oct. 3 earnings report, says Costco would only get a temporary lift to its stock price from the dividend. Instead the warehouse retailer would be better served using its financial power to continue to aggressively open stores globally and pay down debt.

It does make sense, however, that for years Costco has been earmarked for a special dividend payout.

Costco has lots of cash

The company generates a steady stream of cash flow from its members, who renew their memberships each year. As it opens new warehouses serving bulk mustard and toilet paper, Costco’s cash flow stream only gets stronger. Costco finished the quarter ended May 12 with more than $8 billion in cash and short-term investments, almost two times higher than its long-term debt.

Impressive.

Costco also has had a very low debt-to-equity ratio, according to Yahoo Finance Premium data.

All of that has led Wall Street to view Costco as one that should be moving more aggressively to return cash to shareholders beyond buybacks and capital reinvestment.

Fair point, but don’t expect that special dividend anytime soon bulls.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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