Investors who are looking for stocks that are beating the S&P 500 index in terms of a higher dividend yield may want to look at the American retail chain Bed Bath & Beyond Inc. (BBBY, Financial).
As of Tuesday, the company is granting a forward dividend yield of 5.42% versus the S&P 500 index’s dividend yield of 2.05%.
Bed Bath & Beyond is paying a quarterly cash dividend of 16 cents per ordinary share. The dividend was established in 2016 and has increased twice. It increased 20% to 15 cents per share in June 2017 and 6.7% to 16 cents per share last April.
The company will pay the next dividend on Jan. 15. Both the record date and the ex-dividend date have passed.
Bed Bath & Beyond is underpinning the dividend payment with $1.08 billion in cash on hand and short-term investments, with a yearly operating cash flow and sales turnovers that are exceeding $1 billion and $12 billion.
Despite a downturn over the last four fiscal years, the overall trend in the trailing 12-month operating cash flow is still rising. Approximately 60% of the operating cash flow is allocated to the payment of dividends and business growth. Under a $2.5 billion buyback program, Bed Bath & Beyond is using part of its free cash flow to reduce the volume of its outstanding stock. As of Aug. 31, the remaining balance of common shares to be repurchased is about $1.4 billion. In the second quarter, the company spent $41 million to repurchase roughly 2.1 million shares.
Considering that total cash on hand and free cash flow are over 12.5 and 8.5 times the annual dividend, Bed Bath & Beyond can finance the dividend payment for many years even though sales are becoming flat. Total debt is not a problem either. The balance sheet is moderately leveraged, and the interest coverage ratio is 9.89. The threshold for the ratio is 5, so the company can bear the financial burden. Further, investments are returning a higher yield of 10.69% than what they are costing. The cost of capital is 5.96%.
Regarding the slowing down in total sales, this is due to a decline in comparable sales.
Despite strong online sales growth, comparable sales decreased 0.6% in the second quarter and 1.3% in fiscal 2017 compared to the corresponding prior-year periods. In the second quarter, Bed Bath & Beyond reported total sales of $2.94 billion, which was flat from the year-ago quarter. In fiscal 2017, the company reported total sales of $12.35 billion, reflecting a slim 1% increase from the year before.
As illustrated in the chart below, Bed Bath & Beyond’s diluted net earnings have declined over the last five years at an average rate of 6% per year.Â
For full fiscal 2018, which will end Feb. 28, the company forecasts diluted net earnings in the range of $2 per share.
Consensus is for diluted earnings per share of $1.99 on $12.16 billion in revenue.
Bed Bath & Beyond was trading at $12.12 per share in early trading on Wednesday, up about 2.61% from the previous close. The share price has declined 51% for the 52 weeks through Tuesday and is below the 200-, 100- and 50-day simple moving average lines.
The current market capitalization is $1.67 billion.
The 14-day relative strength indicator is 37.71. The 52-week range is $11.38 to $24.74.
The price-book ratio is 0.6 versus an industry median of 1.63, the price-sales ratio is 0.13 compared to an industry median of 0.68 and the earnings yield is 20.8% versus an industry median of 5%.
According to the Peter Lynch chart, Bed Bath & Beyond is undervalued.Ă‚
For Wall Street, the stock is a hold as the recommendation rating is 3.5 out of 5. The average target price of $14.80 reflects 23.5% upside over the next 52 weeks.
Disclosure: I have no positions in any securities mentioned in this article.
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