Earn a 6.6% Yield from Macy’s Stock
When it comes to dividend stocks, investors don’t usually look at companies that are down-and-out. However, some of these companies could represent an opportunity. Today’s article highlights a solid dividend paying company that is currently out of favor: Macy’s Inc (NYSE:M).
For both investors and consumers, Macy’s should be a familiar name. It is one of the biggest retailers in the countr,y with 700 department stores and approximately 125 specialty stores located in 45 states, the District of Columbia, Guam, and Puerto Rico.
Back in the day, retailers were considered pretty solid businesses. The industry had its ups and downs, but retail stocks always had an audience. Nowadays, however, things seem to be changing.
Macy’s stock tumbled more than 25% in the past 12 months. And it’s not alone. Other retailers, such as Target Corporation (NYSE:TGT) and Sears Holdings Corp (NASDAQ:SHLD), also saw sizable declines in their share price over the same period.
One of the most important factors that caused this change in investor sentiment toward retail stocks is the booming e-commerce industry. With online shopping platforms such as Amazon.com, Inc. (NASDAQ:AMZN) reporting impressive sales growth quarter after quarter, many investors are worried that e-commerce will take business away from brick-and-mortar retailers.
It doesn’t help that some retailers—including Macy’s—are reporting year-over-year declines in sales numbers. If the trend continues, department stores could lose even more investor appeal.
The thing is, though, that Macy’s stock offers investors something that don’t have to rely on market sentiment: dividends. And since a stock’s dividend yield moves inversely to its share price, being down and out could bring a stock’s yield up at a given dividend rate.
In the case of Macy’s, the company currently pays $0.3775 per share on a quarterly basis. At today’s price, that translates to an annual yield of 6.6%, a rather impressive number compared to most dividend stocks.
Of course, if the yield is the only thing an investor is going for, they would be buying up the stocks with 25% dividend yields. For income investors, it’s just as important to check whether the company has a durable business model.
For Macy’s, even though the industry climate is far from ideal, the company still has a recurring business model. Last year, the department store retailer generated $25.8 billion in net sales. Macy’s comparable-store sales in 2016 (on an owned and licensed basis) dropped 2.9% from the year-ago period. (Source: “Macy’s, Inc. Reports Fourth Quarter and FY2016 Results,” Macy’s Inc, February 21, 2017.)
The company is testing out new strategies. For instance, it has been running a pilot program on fine jewelry and women’s shoes across Macy’s stores. In a statement issued earlier this month, the company’s president and chief executive officer, Jeff Gennette, said that, “We are encouraged by the performance of the pilot programs we tested last year in categories like women’s shoes, fine jewelry, and furniture and mattresses.” (Source: “Macy’s, Inc. Reports First Quarter Earnings,” Macy’s Inc, May 11, 2017.)
Moreover, these new strategies might be able to reverse the downtrend in sales figures. Gennette said that Macy’s would expand these initiatives nationally this year and expect them to have “a measurable impact” on the company’s performance “starting in the second quarter.” (Source: Ibid.)
A New Catalyst
Another reason why investors looking for dividend stocks should check out Macy’s is that the company is unlocking the value of its real estate portfolio.
Source: “2017 Fact Book,” Macy’s Inc, last accessed May 19, 2017.
As I mentioned earlier, Macy’s has a huge presence in the retail industry, with its department and specialty stores covering almost corner in the U.S. The neat thing is that the company actually owns some of the properties in which its stores are located.
The retail industry might be facing some headwinds, but real estate still has its value. In particular, some of the properties owned by Macy’s are in prime locations. According to Starboard Value LP, an activist investor of Macy’s, in a presentation earlier last year, the company’s real estate assets had a value of $21.0 billion. That’s more than Macy’s current enterprise value! (Source: “Unlocking Value at Macy’s,” Starboard value LP, January 11, 2016.)
The good news is that the company has already started unlocking that value. In the first quarter, real estate transactions brought in $96.0 million for Macy’s, giving the company a handsome real estate profit of $68.0 million.
The Bottom Line On Macy’s Inc
If you have been following dividend stocks, you would know that value is hard to find. Investors are willing to pay a premium for companies with a growing business.
Macy’s, on the other hand, is one of the down-and-out tickers in today’s market. But the company still has a recurring business model and some future catalysts. Due to the downturn in M stock price, its valuations look quite attractive, with a forward price-to-earnings multiple of 8.36 times. Adding the fact that it pays a 6.6% yield, this forgotten dividend stock is one that income investors should not overlook.