During the recent quarter, GAP Inc. (GPS, Financial) reported 3% same store sales growth, its fourth consecutive quarter of positive comps growth. The steady growth in the last year has allowed the stock price to surge by more than 17% during the period. But despite the rise, the dividend yield is still hovering around the 3% levels. Should investors buy GAP as a long-term dividend investment, or is the high yield just a trap?Â
Bad hit to stock despite strong brand portfolio
The apparel major has perfectly positioned its key brands -- Banana Republic, Old Navy and GAP -- at different price points, covering both premium and non-premium segments. The portfolio is cleverly designed to address multiple-price points and specific niches within the apparel world.
But sales struggled in 2015 and 2016, causing the stock price to steadily decline from near-$46 levels in 2014 to under-$20 levels in 2016, pushing the yields higher in the process. Though the stock price has recovered nicely in the last one year, the current above 3% yield clearly shows how hard the stock price was hit in the two prior years.
Current balance sheet health
At the end of the third quarter, GAP Inc. had $1.35 billion cash on hand, which was slightly more than the $1.24 billion in long-term debt the company was carrying in its balance sheet. In the first three quarters of 2017 GAP paid $272 million in dividends, which was 42% of its net income of $643 million and 25% of operating income of $1.08 billion.
The dividend outlay is low, and the company carries virtually no long term debt, which makes its above-3% yield even more attractive than it actually is. The strength of the balance sheet alone is more than enough for GAP to keep paying and increasing its dividends over the next several years.
The company now expects comparable store sales to grow in low-single digits in 2017, which will allow the stock price to keep rising over the next few quarters.
As such, GAP certainly deserves some attention from dividend investors who are looking for solid companies with high yield.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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