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Costco’s a Bargain for Its Bargains and a Solid Dividend

Real Money contributor Chris Versace says Costco’s growth plans and consumers’ needs sync up for a solid opportunity.

While the economy is reopening and businesses are starting to reap the rewards, consumers are still hunting for deals as many are still struggling after being out of work during the pandemic, while others still live paycheck to paycheck.

The government stimulus checks and forbearances on federal student loan payments were temporary reprieves for many Americans who struggled even before the impact of COVID-19, as the cost of living has not matched wages in decades.

Consumers are still turning to shopping at warehouse clubs for food and other personal items, and Costco Wholesale Corp.  (COST) - Get Costco Wholesale Corporation Report remains a favorite of Real Money contributor Chris Versace.

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Versace writes in a recent column that Costco, shares of which are up nearly 12% in the past three months, has retained its loyal customers for several years, which is a good sign since its membership business model is different from its competitors. The annual membership fee generates 60% to 70% of the company's pre-tax income, he notes.

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Despite the pandemic, Costco has been expanding its footprint and as of the end of June, it had 810 warehouses, compared to 788 a year ago. Management plans to increase the number of warehouses in future quarters, which bodes well for its profit margin.

“As the company opens more warehouse locations, the size of its membership grows and every few years a modest price increase adds considerably to the earnings power associated with that business model,” Versace writes.

Versace said he’s anticipating some significant gains for Costco, since people will be shopping more next month for back-to-school items and taking advantage of the end of summer sales. Costco shares added almost 1% on Thursday to close at $425.28

Consumers will have to keep pinching their wallets and searching for bargains as they face paying mortgages, student loan payments and car loans – Pymnts and LendingClub’s recent report showed that even people who earn between $50,000 and $100,000 annually, do not have much savings after shelling out money for their bills each month.