Macy’s Inc Could Provide More than Its 4.5% Dividend Yield
Big Upside in Macy’s Stock?
If a retail company can’t grow its sales even in the holiday season, it’s probably not going to be a stock market favorite. Macy’s Inc (NYSE:M) stock has been the latest example. But does that mean investors should cross Macy’s stock off their lists?
Headquartered in Cincinnati, Ohio, Macy’s Inc is one of the oldest department stores in the U.S. The company currently operates about 880 stores in 45 states, the District of Columbia, Guam, and Puerto Rico.
If you have been following the stock market in recent years, you would know that retailers haven’t really been a hot commodity. With the boom of the e-commerce industry, investors are worried that consumers will move from physical stores to online shopping platforms.
Other than that concern, things haven’t exactly been going well at Macy’s either. Last month, the company announced that in the months of November and December 2016 combined, comparable sales declined 2.1%. Macy’s also said that it would close 68 stores resulting in approximately 6,200 job cuts. (Source: “Macy’s Inc. Announces Actions to Streamline Store Portfolio, Intensify Cost Efficiency Efforts and Execute Real Estate Strategy,” Macy’s Inc, January 4, 2017.)
Disappointing results have hurt the performance of Macy’s stock. Since reaching over $72.00 per share in July of 2015, M stock has lost more than 50% of its value.
One of the consequences of such a huge drop in stock price is that the company’s yield now looks quite attractive. Trading at around $33.00 a share on Monday morning, M stock has an annual dividend yield of 4.5%. Given that the average yield of S&P 500 companies is about two percent at the moment, investing in this stock today would provide a yield more than double that.
However, a high dividend yield is not the only reason to consider Macy’s stock right now. Because other than collecting dividends, M stock investors could also look forward to some sizable capital gains.
This potential comes from the company’s giant real estate portfolio. In case you didn’t know this, Macy’s actually owns some of the properties at which its stores are located. Those properties are often found in prime locations. And while sales at Macy’s stores aren’t really doing that well, these properties are still quite valuable. If the company manages to unlock the value of some of those real estate assets, it would be a huge catalyst for Macy’s stock.
To see how much Macy’s real estate assets could be worth, let’s take a look at what activist investor Jeffery Smith had to say. Smith’s hedge fund, Starboard Value LP, invested in Macy’s in July of 2015. He was reported as being unhappy with M stock’s performance.
In a presentation last year, Starboard Value said that Macy’s real estate assets were valued at $21.0 billion. Moreover, the hedge fund believed that, “with the real estate market near all-time highs, now is the time to separate Macy’s real estate assets and create value for shareholders.” (Source: “Unlocking Value at Macy’s,” Starboard Value LP, January 11, 2016.)
Today, Macy’s has an enterprise value of $16.82 billion. So if its real estate assets alone are worth $21.0 billion, Macy’s stock certainly seems underappreciated.
In Starboard Value’s presentation, the hedge fund said that Macy’s could pursue a joint venture (JV) transaction. The retailer would drop down Macy’s iconic stores and a large part of its mall stores into two separate JVs. Macy’s could partner with different companies for each JV.
The Bottom Line On Macy’s Stock
Now, there might be an even easier way for Macy’s stock investors to be rewarded. Earlier this month, it was reported that Canadian retailer Hudson’s Bay Co (TSE:HBC) was trying to buy Macy’s. The talks are reported to be at an early stage. (Source: “Canada’s Hudson’s Bay makes takeover approach for Macy’s: Sources,” CNBC, February 4, 2017.)
With so much value yet to be unlocked, I wouldn’t be surprised if a potential buyer decides to pay a double-digit premium for Macy’s Inc. And that should be good news for Macy’s stock investors.