The Second-Highest-Yielding S&P 500 Stock Now Pays 9%
L Brands Inc: An Overlooked Dividend Play?
The S&P 500 index is one of the most widely followed indices of the U.S. stock market. The index is made up of some of the largest companies in the world. These companies often have entrenched positions in their operating markets, and many of them can afford to establish regular dividend policies.
However, the problem is that because everyone knows about the index, its components are always highly sought after. Due to the inverse relationship between dividend yield and stock price, S&P 500 companies are not really known as high yielders.
And the surge in the U.S. stock market over the last several years has only added fuel to the fire. Right now, the average dividend yield of all S&P 500 companies stands at just 1.75%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed August 30, 2018.)
And that, my dear reader, is why L Brands Inc (NYSE:LB) stands out. The company was added to the S&P 500 index in September 1983 and has remained in the index ever since. And yet, it manages to offer investors an annual dividend yield of nine percent!
In fact, L Brands is currently the second-highest-yielding name among all S&P 500 companies.
The big question now is, should income investors chase this ultra-high yield?
Let’s take a look.
LB Stock: Not Exactly a Stock Market Favorite
At first glance, L Brands doesn’t seem like a familiar name. But I’m sure you’ve seen some of its stores at the mall. The company is a specialty retailer that owns and operates Victoria’s Secret, PINK, Bath & Body Works, La Senza, and Henri Bendel.
Today, L Brands has more than 3,000 stores located across the U.S., Canada, the U.K., Ireland, and Greater China. At the same time, its products are also sold through more than 800 franchised locations around the world.
If you’ve been following the markets, you’d know that the retail industry hasn’t really been an investor favorite lately. The reason is simple: with consumers spending more and more money at online vendors, investors are worried that sales at brick-and-mortar retailers would slow down.
Since L Brands owns and operates thousands of physical stores, its stock took a big hit. Year-to-date, LB stock plunged more than 50%. Ouch!
But as I mentioned earlier, a company’s dividend yield moves in the opposite direction to its stock price. So with LB shares trading deep in the doldrums, the stock can offer a jaw-dropping yield.
Is the drop in LB stock justified?
Well, if you look at the company’s financials, you’d see that things might not be as bad as some people had thought.
Growing Sales in the Retail Apocalypse?
Consider that in 2013, L Brands generated total sales of $10.8 billion. By 2017, the number had grown to $12.5 billion, marking a 16% increase. (Source: “L Brands,” L Brands Inc, last accessed August 30, 2018.)
According to L Brands’ latest earnings report, the company generated $2.98 billion of net sales in the second quarter of its fiscal year 2018, representing another 8.3% increase year-over-year. Comparable store sales, a critical measure of a retailer’s performance, improved by three percent in the second fiscal quarter. (Source: “L Brands Reports Second Quarter Earnings,” L Brands Inc, August 22, 2018.)
With growing sales figures, the company is a rare find in today’s beaten-down retail industry.
Still, L Brands is not perfect. While the top line number looks great, bottom line results were not nearly as impressive. In the second fiscal quarter, the company’s earnings came in at $0.36 per share, representing a 25% decline from the $0.48 per share earned in the year-ago period.
Furthermore, management reduced their full-year earnings guidance to $2.45 to $2.70 per share. Previously, they expected L Brands to earn between $2.70 and $3.00 per share in full-year fiscal 2018.
Will that be enough to cover the dividend?
Well, L Brands has a quarterly dividend rate of $0.60 per share, so it is on track to pay total dividends of $2.40 per share in full-year fiscal 2018. If the company achieves its earnings guidance and earns between $2.45 and $2.70 per share for the year, it will be able to cover its dividends. However, the margin of safety would be quite thin.
Bottom Line on L Brands Inc
At the end of the day, keep in mind that due to the nature of the company’s business, a substantial part of its earnings and cash flow are generated during the holiday season. Therefore, L Brands’ fourth-quarter results will be key on whether it can deliver on its financial guidance.
If the company does meet its expectation and covers the dividend, its nine-percent yield could be worth a look.
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