These Two Retailers Just Raised Their Dividends: Are they Buys?

Published on

Dividend increases are usually signs of a healthy company, typically indicating the firm has generated solid earnings and has enough excess cash to reward its shareholders. Within the past week or so, two retailers — the large-cap Ross Stores (NASDAQ:ROST) and the mid-cap Academy Sports and Outdoors (NASDAQ:ASO) — bumped up their dividend payouts.

Let’s take a closer look at these two stocks to see if these dividend increases warrant a look from investors.

A sizable boost for Ross

Ross Stores is a discount clothing store chain with some 1,700+ stores across the U.S., making it one of the largest clothing retailers in the nation.

Last week, the company posted fourth-quarter earnings that soundly beat analysts’ estimates. The retailer saw its sales increase 15% year over year in the quarter to $6 billion, while its same-store sales rose 7%. Net income came in at $610 million or $1.82 per share, up from $447 million or $1.31 per share in the same quarter a year ago. The operating margin increased 165 basis points in the quarter to 12.4%, due primarily to strong same-store sales and lower freight costs.

With a strong balance sheet that includes $4.9 billion in cash and $1.9 billion in operating cash flow, Ross was able to launch a two-year stock-buyback plan and raise its dividend 10% to 37 cents per share at a yield of 1%. The retailer has a low payout ratio of 24%, so it should be sustainable, even with modest growth expected in 2024.

Academy Sports and Outdoors is not due to report its next earnings release until March 21, but it already declared an 11-cent-per-share quarterly dividend, payable to shareholders on April 18. It represents a 22% increase over the last dividend at a yield of 0.53%

While we don’t have the latest quarterly results yet, this sporting goods retailer reported disappointing earnings results for the third quarter, posting a 6.4% drop in sales to $1.4 billion and a 24% decline in net income to $100 million. Academy Sports also lowered its revenue and net income guidance ranges for fiscal 2023.

“In this challenging macro-economic environment, Academy remains focused on expense control and inventory management in order to maintain healthy margins and optimize cash flow,” Chief Financial Officer Carl Ford said in the Q3 earnings report. “This strategy enables us to maintain a strong balance sheet as well as self-fund our strategic initiatives. We are also focused on creating shareholder value, demonstrated by the $44 million of share buybacks and $7 million of dividends paid to shareholders during the quarter.”

Which is the better buy?

Of these two dividend raisers, one stock clearly stands out. Ross Stores has a higher yield, a stronger balance sheet, lower debt in relation to cash flow, better efficiency, and solid earnings growth with modest gains expected in 2024. Additionally, as a discount clothing retailer, it should see robust demand in relation to competitors if the economy slows.

Meanwhile, investors will want to tune in to Academy Sports’ fourth-quarter earnings report on March 21 for its fiscal 2024 outlook. However, based on its last quarterly report and its guidance for the end of 2023, it has underperformed. It also has a lower dividend yield.

The consensus price target among analysts for Ross Stores is $163 per share, which would be about 12% higher than its current $145-per-share price. With a reasonable valuation of about 25 times forward earnings, Ross looks like a solid overall buy — both for its dividend and its potential for capital appreciation. Thus, it looks like the better buy of the two stocks.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.