Retail stocks that pay dividends are like a shareholders’ loyalty program. A bonus payment for owning the stock. Some of the dividend providing retail stocks are paying a higher yield than treasury bonds.
Retailers that pay dividends do so to increase shareholder value. The strategy is that by paying a dividend, a company attracts new investors and retains loyal shareholders. If a company doesn’t pay dividends, they are usually expected to deliver better-than-average earnings. The thought being that by keeping the cash in-house, the company should have better earnings.
“I’m a big believer that dividend income is a great signal of a good company,” said Bill McMahon, chief investment officer at Thomas Partners, a Charles Schwab Subsidiary. “It means the company is confident about its earnings.”
Several companies are sticking with their dividends even as the stock market has lost enthusiasm for the stock. For example, Stage Stores stock is down 59 percent year-to-date, but its dividend has a yield of over 7 percent. “Our board feels very strongly about dividends,” said Oded Shein, chief financial officer at Stage Stores during the Jefferies Global Consumer Conference in June. “We raised dividends every year for the past six years. I think 8 out of the last 10, except the recession years.”
Kohl’s stock has dropped 25 percent over the past year, while the company continues to pay $1.80 per share in dividends for a yield of 4 percent. During the company’s fourth-quarter conference call in February, chief financial officer Wesley McDonald said that since paying its first dividend in 2011, Kohl’s has increased it by a compound annual growth rate of 16 percent.
Evan as Coach works its way through a transformation, the company continues to pay its dividend. Coach’s dividend yield is over 4 percent with the dividend paying $1.35 a share annually. The shares have lost 14 percent of their value over the last year as the company is in reboot mode. Andrea Resnick, global head of investor relations at Coach said during the Sanford Bernstein Strategic Decisions Conference in May, “We’re very committed to our dividend. That’s about a $370 million-a-year commitment.”
“From a financial context, we’ve had almost two decades of growth in the retail business,” said Sandy Pomeroy, managing director and partner at the MLG Group. “Now it’s shifting from growth to operational and the companies are super cash-flow positive.”
Analysts have been concerned about the dividend that Men’s Wearhouse was paying. The suit retailer is struggling with its Jos. A. Banks acquisition and sales have declined. It was only natural for analysts to ask about the financial comfort to pay out a dividend, which is 72 cents a year per share. The company said during its December earnings call that it saw no need to cut the dividend, which has almost a 5 percent yield. That type of talk implies confidence from the company that it will have the cash to pay out to shareholders.
Estée Lauder stock has been a winner in both directions this year for shareholders. The stock gained 15 percent in value for the year and over the past 5 years, the stock price has increased by 150 percent. As a bonus, the dividend rate has grown by 13 percent since 2012. Estée Lauder pays 96 cents per share annually for a yield of 1.3 percent.
The dividends aren’t always a sure thing if the underlying companies begin to face serious challenges. Many investors dump stocks if they quit paying dividends. Bebe reported a third-quarter loss in May and suspended its dividend. The day that happened, the stock fell from $3.24 to $2.91. Chief financial officer Liyuan Woo expressed surprise that the market reacted so badly to the dividend news, she thought it was a prudent action to take. Shareholders, however, see dividend suspension as a sign of cash flow trouble.
Bon-Ton Stores also decided to not pay a dividend in its last quarter. On the earnings conference call in November, the company said it had seen its sales drop in the winter due to the warmer weather and said that since the shareholders had a deficit it wouldn’t pay a dividend, but would review it again at year-end. That day the stock opened at $1.91 and closed at $1.21, a punishing drop for underperformance.
The investor base for these retail companies could see a shift from growth investors to dividend investors. Beaten down retailers with a good dividend track record could attract a new group of shareholders. Pomeroy said that companies with strong free cash flow, but a low dividend may be setting themselves up to boost their payout. “It’s a good hunting ground for people like me looking for companies that will grow their dividends.”