Wednesday, May 15, 2019

Macy's big dividend and a catalyst for growth

This is the first new name I have added to my portfolio of income stocks this year.  My motivation is strictly to move some more money into income from a high yielding dividend stock.  I always hope for capital appreciation and I am always nervous about stock price deterioration, but when I find a stock with a low P/E and a high yield, I look further.

  • Robust 6.7% Dividend Yield
  • Price Earnings ration less than 7
  • Strategic moves to take on head winds
  • Call Option support

Stocks are cheap for a reason and Macy’s has every reason to be cheap.  Macy’s, symbol M, is in the retail sector.  All the oxygen in this space is being consumed by Amazon.  Macy’s has the scale needed to compete in their narrow range of retail.  Macy’s has good cash management suggesting it will continue to pay the dividend.  Macy’s is very near the 52 week low with a very low price earnings ratio known as P/E ratio.

Macy’s Dividend Machine Fundamentals:

The table below presents the criteria I use to pick dividend stocks.   Earnings must exceed dividends paid out; dividend must beat any U.S. Treasury, dividend should grow, and D/E (debt to equity ratio) should be 1 or less or within industry standard.  
M E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$21.94 $3.56 $1.51 6.88% 0.00% 0.74

Macy’s fails on recent dividend growth but meets all the other hurdles. If you go back five years, the dividend has increased 20.45% or 4.13% per year.   We do not know the direction the dividend will take but we have some factors that are positive.

Dividend History is important.  They have managed to pay a dividend through several periods of disruption.  This is comforting as I am hoping to cash these dividends for 10 – 20 years. 

I also like to see growing revenue because that fuels earnings which fuels dividends.  One of the reasons M is cheap is that future growth of revenues is speculative.  

This is not an encouraging pattern as you can see.  And, that is why M is selling with a P/E under 7.  I am hoping for no less than stable revenue to drive the current dividend.  But I really do think the catalyst for future revenue growth and future potential dividend growth lies in the strategic changes Macy is making right now.

I think Macy’s is on the right track.  Read this link on how they are transforming their effort to include more digital sales. Based on the earnings reported today, they feel they are making distinct progress. 

Regarding Dividend Machine fundamentals.  I consider Macy’s a good risk at this point.  

Is a non dividend growth stock worth the effort?

If you buy a stock with dividend yield of 2.5% but with dividend growth of 10% would that be a better investment for income investors than a stock like Macy’s which pays a 6.4% yield with no dividend growth.   I used a $20,000 investment in each stock in this scenario.

It would take 11 years of dividend growth to achieve the same income from the higher yielding stock.  Young wealth builders with long time horizons should do a different analysis that includes dividend reinvestment and potential stock price appreciation. 

This analysis is for investors who rely on income and have a diversified portfolio.  Over 6% dividend yield is hard to find especially at such a cheap price.

Adding Macy’s with implied support from call option buyers

I added Macy’s today with a cost basis of about $22.00.   I see some positive support from calls.  I prefer to keep my call expirations under 90 days.  The call presented below has an expiration date of 8/16/2019.  I will cash the dividend along with the premium if I took this call.  I probably will not sell the call on the position I am building.  However, if the calls stay this robust, I just might take a larger position than usual and sell calls on some of it.

Macy’s is good stock for income investors to consider for their portfolios.  M has good Dividend Machine fundamentals except for dividend growth, and it has a catalyst that just might make it a home run.

M* MoneyMadam

Long M
May 15, 2019 First Quarter Earnings Report