This Out-of-Favor Stock Provides a Big Yield
If you look at the stock price performance of many retail companies, you’d think that we are in a recession. Over the past several years, many retail stocks have fallen deep into the doldrums. Double-digit tumbles were not uncommon. Some have even filed for bankruptcy.
Macy’s Inc (NYSE:M) happens to be one of the beaten-down retail stocks. The department store chain saw its share price plunging more than 60% over the last five years.
But we know there is an inverse relationship between a company’s dividend yield and its stock price. That is, if the cash payout remains constant, the lower the stock price goes, the higher the dividend yield becomes.
What’s even better is that in the case of Macy’s stock, the cash payout did not just stay constant. Over the past five years, Macy’s quarterly dividend rate actually went from $0.3125 per share to $0.3775 per share, marking an increase of 20.8%. (Source: “Dividend History for Macy’s (M),” Street Insider, last accessed July 4, 2019.)
Now, a company’s dividend yield is calculated by dividing its annualized cash payout by its stock price. When calculating Macy’s dividend yield, we have an increasing numerator and a decreasing denominator. The result is that the yield of M stock has gotten much, much higher over the years.
Trading at $21.27 per share, Macy’s Inc offers investors an annual yield of 7.1%. To put that in perspective, the average dividend yield of companies in the S&P 500 Index (Macy’s is an S&P 500 company) is just 1.8% at the moment. In other words, if an investor purchases M stock today, they would be earning a yield that’s nearly four times the benchmark’s average. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed July 4, 2019.)
Obviously, that yield—especially because it’s from an out-of-favor stock—seems too good to be true. So let’s take a look at the company’s financials and see if it can actually afford the payout.
Is the Dividend Safe at Macy’s Inc?
In 2018, Macy’s Inc. generated adjusted earnings of $4.18 per share while declaring four quarterly dividends totaling $1.51 per share. Therefore, the company had a payout ratio of 36.1% last year. (Source: “Macy’s, Inc. Reports Fourth Quarter and Fiscal Year 2018 Earnings and Provides 2019 Guidance,” Macy’s Inc, February 26, 2019.)
Fast forward to this year, things also looked solid so far. In the first quarter of 2019, Macy’s Inc’s adjusted earnings came in at $0.44 per share, which easily covered its quarterly cash dividend of $0.3775 per share. (Source: “Macy’s, Inc. Reports First Quarter 2019 Earnings,” Macy’s Inc, May 15, 2019.)
In the latest earnings release, Macy’s management also reaffirmed their full year guidance. For full year 2019, they expect the company to earn an adjusted profit of $3.05 to $3.25 per share. If Macy’s achieves the midpoint of the guidance range and earn $3.15 per share, its expected annual dividend payment of $1.51 per share would result in a payout ratio of 47.9%, which is not a high number by any means.
What this means is that despite headwinds in the retail industry, Macy’s Inc is actually maintaining a rather conservative payout ratio. Moreover, this also suggests that even if business slows down, there is still a good chance for the company to earn enough profits to cover its payout.
Sales Growth At a Beaten-Down Retail Stock?
The best part is, the situation at Macy’s may not be as bad as what its stock price performance seems to suggest. Last year, the company’s comparable sales increased 1.7% at its owned stores and two percent at its owned and licensed stores. In the first quarter of this year, Macy’s comparable sales grew 0.6% at its owned stores and 0.7% on an owned plus licensed basis.
Mind you, the first quarter of 2019 also marked the sixth consecutive quarter where Macy’s Inc delivered positive comparable sales growth.
One of the biggest factors behind the current downturn for many brick-and-mortar retailers is the booming e-commerce industry. Because consumers can buy almost anything online, they don’t need to visit physical stores as often as before.
But Macy’s Inc managed to turn this e-commerce headwind into a catalyst through its digital strategy.
“As an omnichannel retailer, we are focused on growing our customer base by providing a great experience across all channels and taking market share category by category,” said company Chairman and Chief Executive Officer Jeff Gennette in the latest earnings press release. “We had another quarter of double-digit growth in our digital business, and mobile continues to be our fastest-growing channel.” (Source: Ibid.)
The Bottom Line on Macy’s Inc Stock
At the end of the day, market sentiment is yet to turn bullish towards the department store industry. That means it’s hard to say when M stock will bounce back up, even if the company continues to deliver comparable sales growth.
However, if the goal is to earn oversized dividends, then the conservative payout ratio at Macy’s Inc does make its 7.1% yield look quite appealing.