Valuation And Dividend Safety Analysis: Williams-Sonoma (WSM)

Valuation And Dividend Safety Analysis: Williams-Sonoma (WSM)
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Williams-Sonoma, Inc. (NYSE:WSM) is a leader in cooking and dining products, and home furnishings. The retailer has successfully made the transition to majority online sales and has been able to fend off well capitalized competitors. The top and bottom lines have been growing and COVID-19 has provided a tailwind. Williams-Sonoma is a Dividend Contender having raised the dividend for 15 straight years. The company continues to generate strong cash flow and returns it to shareholders through dividend and stock buybacks. In addition, the business is asset light and there is currently no debt on the balance sheet. I view Williams-Sonoma as a long-term buy.

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Overview of Williams-Sonoma

Williams-Sonoma is a specialty retailer in the U.S. that was founded in 1956. Today, the company owns and operates the Williams-Sonoma, Pottery Barn, Pottery Barn Teens, Pottery Barn Kids, West Elm, Rejuvenation, and Mark and Graham brands. Williams-Sonoma sells cooking and dining products, and home and college dorm furnishings and other items. The retailer has about 538 stores in the U.S., 21 stores in Canada, 19 stores in Australia, and 3 stores in the U.K. The company also has franchise stores in the Middle East, Philippines, Mexico, and South Korea. Total revenue was $6,783 million in 2020 and $7,755 in LTM.

Selected Data for Williams-Sonoma (NYSE)

Ticker WSM
Market Cap $13.67 billion
Stock Price $185.70
Dividend (FWD) $2.84
Dividend Yield 1.54%
P/E Ratio (FWD) 13.77

Source: Data from Seeking Alpha (as of August 30, 2021)

Williams-Sonoma Dividend and Dividend Safety

Williams-Sonoma is dividend growth stock that has raised the dividend for 15 consecutive years making the company a Dividend Contender. The current forward dividend is $2.84 per share and the stock is yielding approximately 1.54% as of this writing. This yield is lower than normal for Williams-Sonoma and reflects the strongly rising stock price during the COVID-19 pandemic. The average dividend yield in the past 5-years is about 2.74%.

The company announced a quarterly dividend increase of 20.3% to $0.71 per share from $0.59 per share on August 25, 2020. The retailer has good dividend growth rates of 7.38% in the trailing 5-years and 13.61% in the past decade. According to the Chowder Rule this gives a Chowder Number (CDN) of 8.92%.

Williams-Sonoma has solid dividend safety metrics from the perspective of earnings, free cash flow, and the balance sheet.

From an earnings perspective, the dividend was safe in year 2020. The payout ratio was approximately 23%. Importantly, the payout ratio has come down from about 44% in 2017 through a combination of smaller dividend increases and strong earnings gains in the past few years. COVID-19 provided a strong tailwind in 2020 as well to earnings resulting in a lower payout ratio.

From a forward earnings perspective the payout ratio is very conservative at approximately 21% based on the forward dividend of $2.84 per share and consensus fiscal 2021 earnings per share of $13.36. This is below my target value of 65% and suggests that the dividend is very safe.

The dividend is also very safe from the perspective of free cash flow. In fiscal 2020, free cash flow was about $1,105 million. The dividend required ~$158 million giving a dividend-to-FCF ratio of roughly 14%. This is well below my threshold of 70%.

Williams-Sonoma has a very conservative balance sheet. At end of Q2 2021, the company had ~$665 million in cash and cash equivalents. There is no short-term debt or long-term debt. The main obligations for the company are capital lease obligations. Debt poses very little risk for the dividend.

Competitive Advantage, Risks, and Valuation for Williams-Sonoma

Williams-Sonoma’s main advantages are its strong brands, differentiated product mix, and the fact that the company has successfully transitioned to majority online sales at 70%+ in 2020. This has allowed the retailer to increase gross, operating, and net profit margins.

Williams-Sonoma is a retailer and thus faces significant competition from both e-commerce and bricks and mortar retailers. The company’s competition includes retailing giants like Target (NYSE:TGT), Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), and privately held IKEA. Smaller niche online retailers also provide competition. The barriers to entry are low since most products are made from contract manufacturers. The markets Williams-Sonoma operates in are very fragmented meaning new entrants could get a toehold in a niche. Furthermore, the company is in a cyclical industry that is somewhat tied to home sales creating some risk to the top and bottom lines.

Despite the recent run up in stock price, Williams-Sonoma is slightly undervalued based on consensus fiscal 2021 earnings of $13.36 per share. At the current stock price Cisco trades at a forward price-to-earnings ratio of about 13.8X. The multiple in the past decade as been close to 16X giving a fair value estimate of roughly $213.76.

The combination of strong brands, a growing dividend, dividend safety, and undervaluation makes Williams-Sonoma a long-term buy in my opinion.

Disclosure: None.

About the Author

Dividend Power is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading personal finance blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 3% out of over 8,116 financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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