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.
| 5/15/2019 | |||||||
| 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.
https://www.businessinsider.com/macys-digital-transformation-continues-to-fuel-profit-2019-5
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.
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
