Is Dillard's Special Dividend a Value Signal?

A retailer that's done very well in the post-pandemic period will pay its investors a special dividend of $15 per share

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Dec 08, 2022
Summary
  • Department store Dillard's has achieved industry-leading margins and capital gains in recent quarters.
  • It has good fundamentals, pays a small but regular dividend and has reduced its shares outstanding by 9.5% per year for 10 years.
  • The stock price has soared in recent quarters, and investors must ask themselves if the stock has now become overvalued.
  • However, a hefty special dividend could indicate the stock is still undervalued.
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Investors who own Dillard's Inc. (DDS, Financial) as of Dec.14, 2022 will be eligible for a special dividend of $15.00, besides the company's regular dividend. That special dividend will be paid on Jan. 9, 2023.

That’s a sizable amount of cash returning to shareholders. Previously, I was beginning to think that Dillard's was getting overvalued with how much the stock has risen in recent quarters, but this hefty special dividend raises the possiblility that it might still be a value opportunity after all. Let's take a closer look at the company's fundamentals to see whether that's the case.

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About Dillard's

Dillard's is a department store that calls itself one of “the nation's largest fashion apparel, cosmetics and home furnishing retailers” in its 10-K for 2021. At the end of the third quarter of this year, it operated 249 regular retail outlets and 28 clearance stores, totaling 47.3 million square feet across 29 U.S. states. In addition, it operates an e-commerce website.

Ladies’ apparel provides the biggest contribution to net sales, followed by men’s apparel and accessories, shoes and ladies’ accessories and lingerie. The home and furniture segment makes up just 4% of net sales.

Competition

Not surprisingly, the company operates under what it calls “highly competitive conditions.” It reports national and local competitors, including specialty, off-price, discount and internet retailers.

GuruFocus lists Macy’s Inc. (M, Financial), Kohl’s Corp. (KSS, Financial) and Nordstrom Inc. (JWN, Financial) as some of those competitors. This is how Dillard's characterized industry competition: “many factors including location, reputation, merchandise assortment, advertising, price, quality, operating efficiency, service and credit availability. We believe that our stores are in a strong competitive position with regard to each of these factors.”

That claim is backed up by industry-leading margins and returns on both equity and assets. Perhaps as a result of its strong competitive position, the company has really outperformed on the capital gains front in the past year and a half:

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Financial strength

Based on its debt, as measured by the interest coverage ratio, the debt-to-revenue ratio and the Altman Z-Score, Dillard's scores an 8 out of 10 ranking for financial strength from GuruFocus:

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The interest coverage ratio shows that Dillard's has $28.77 in operating revenue for each dollar of interest charges, which is solid.

The company’s short-term debt at the end of 2021 was zero and its long-term debt was $773 million (down from $915 million in the previous year). Revenue for the year was $4.433 billion, providing a debt-to-revenue ratio of $0.17.

The Altman Z-Score, which indicates how close a company might be to serious financial trouble or bankruptcy, is 7.02, which is well into the safe zone.

The Piotroski F-Score is a full 9 out of 9, which indicates excellent financial management. The weighted average cost of capital (WACC) is 6.7% while the return on invested capital is 56.02% (ROIC), indicating the company creates a great deal of value for shareholders.

Profitability

The GuruFocus profitability ranking of 8 out of 10 comes from solid profitability indicators such as the operating margin, the Piotroski F-Score, the trend of the operating margin, the consistency of profitability and the business predictability rank.

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With an operating margin of 17.25%, Dillard's outperforms 91.32% of peers and competitors in the retail-cyclical industry. The industry mean is just 3.51%. As for the trend of the operating margin, that would be anything but consistent:

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The Piotroski F-Score is excellent, but the consistency of earnings is not:

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And, as might be expected from the earnings per share without non-recurring items chart, the company has a low business predictability rating of just 1 out of 5 stars.

Given its bouncing operating margin and earnings per share, along with a low predictability rating, the overall profitability ranking of 8 out of 10 seems to mainly stem from factors such as the currently high margins, the high Piotroski F-Score, the solid return on equity and return on assets and the fact that the operating margin is on a strong uptrend.

Growth

The company has a GuruFocus growth ranking of 7 out of 10, based on factors such as the three-year and five-year revenue growth, five-year Ebitda growth and the predictability of five-year revenue. That’s a lot of emphasis on revenue, which is hardly Dillard's best growth metric:

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Here’s the story on revenue growth over the past decade, which was trending lower until it began recovering from the pandemic:

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The Ebitda story is much the same except that the recovery was even more pronounced last year, as was the recovery in free cash flow. Earnings per share without non-recurring items took much the same path, a slow decline, a deep decline during the pandemic and then a supercharged recovery this year.

Dividend

Now we get to the elephant in the room, the special dividend. At $15.00, the special dividend is extremely rich when compared with the regular dividend of $0.80 per year. In fact, $15.00 is the equivalent of receiving the regular dividend for 18 and three-quarter years in advance.

The company also paid a $15.00 special dividend in the fourth quarter of last year, which leads me to wonder if this will become a regular event. Of course, a special dividend is just that- special. It’s a way to give back to shareholders without having to commit to doing it regularly.

For this year, the regular and special dividends combined amount to $15.80. Dividing that by the share price of $358.05 at the close on Dec. 7, 2022 gives us a yield of 4.21%, significantly higher than the normal dividend yield of 0.22%.

This year’s special dividend reflects the rebounds we saw in the earnings and free cash flow charts we saw above. Whether that will happen again next year will depend on financial circumstances at the end of the third quarter of 2023.

Dillard's also has an ambitious share buyback program, one that has seen the company consistently buy back about 9.5% of its shares every year for the past decade. That’s another return shareholders should consider.

Valuation

Just over a year and a half ago, Dillard's was a $100 stock, and back in July 2020 it was a $25 stock because of the Covid selloff Since then, it skyrocketed and then leveled out:

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That chart suggests the stock is overvalued, a conclusion backed up by the GF Value chart:

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However, the price-earnings ratio is low at 7.09 and is better than 83.33% of companies in the retail-cyclical industry. Given that ratio and a five-year Ebitda growth rate of 4.56%, we arrive at a PEG ratio of 0.80, which is just within the undervalued boundary of 1.0.

Despite these ratios, I would argue the company is still overvalued, based on the assumption that the current share price reflects the post-Covid retail buying spree and not what the company has delivered over the past decade. I don't think the current hot retail sector earnings will last forever.

Gurus

Only three gurus had stakes in Dillard's at the end of the third calendar quarter. Jim Simons (Trades, Portfolio) of Renaissance Technologies owned 48,400 shares, representing a 0.28% stake in the company and 0.02% of the firm's 13F portfolio. Chuck Royce (Trades, Portfolio) of Royce Investment Partners held 41,574 shares, while Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management owned 3,517 shares. During the quarter, Simons and Greenblatt reduced their positions by 20.53% and 42.95% respectively. Royce added 3.74%.

Institutional investors also had a small stake pf 21.6% of shares outstanding, while insiders owned 4.2%.

Conclusion

A special dividend of $15.00 is certainly attractive. If I already owned the stock, it would be an excellent incentive to keep holding it.

However, a big question for investors about Dillard's is where the company goes from here. Was there some sort of pent-up buying fever following the Covid lockdowns? I believe so. That would suggest Ebitda, earnings and free cash flow could slump again in coming years.

Thus, in my opinion, the special dividend should not sway an investor who might be considering the stock..

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure