Victoria Secret's Owner is Not a Buy After Special Dividend

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A specialty retailer of personal care products, accessories, and intimate apparel for women just announced a special dividend of $3 per share on the existing yield of 2%. The special dividend would give investors nearly 5.8%, on the trading price of $51.96 after hours. With more than 288 million shares outstanding, the special dividend would be $864 million, higher than the company's cash on hand at $547 million. That retailer is Limited Brands (NYSE: LTD), the owner of Victoria’s Secret, Henri Bendel, La Senza, etc. Is this stock attractive after its special dividend announcement? 

Historical market performance

It seems like the women spiced it up! They love the brands so much that the stock has outperformed its peers, including The Gap (NYSE: GPS) and Hanesbrands (NYSE: HBI), by a wide margin. 

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The total return is made by the combination of capital gains return and dividends return. In the last 5 years, including dividends, Limited Brands has gained by more than 260% for its shareholders, whereas Gap and Hanesbrands only gained 63% and 21%, respectively.

Back up by Consistently Positive But Fluctuating Performance

In the last 10 years, Limited Brands has managed to deliver consistent positive net income and generate positive free cash flow.

<table> <tbody> <tr> <td> <p><em>USD million</em></p> </td> <td> <p><strong>2002</strong></p> </td> <td> <p><strong>2003</strong></p> </td> <td> <p><strong>2004</strong></p> </td> <td> <p><strong>2005</strong></p> </td> <td> <p><strong>2006</strong></p> </td> <td> <p><strong>2007</strong></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>8,445</p> </td> <td> <p>8,934</p> </td> <td> <p>9,408</p> </td> <td> <p>9,699</p> </td> <td> <p>10,671</p> </td> <td> <p>10,134</p> </td> <td> <p>9,043</p> </td> <td> <p>8,632</p> </td> <td> <p>9,613</p> </td> <td> <p>10,364</p> </td> </tr> <tr> <td> <p><strong>EPS (USD)</strong></p> </td> <td> <p>0.96</p> </td> <td> <p>1.36</p> </td> <td> <p>1.47</p> </td> <td> <p>1.66</p> </td> <td> <p>1.68</p> </td> <td> <p>1.89</p> </td> <td> <p>0.65</p> </td> <td> <p>1.37</p> </td> <td> <p>2.42</p> </td> <td> <p>2.7</p> </td> </tr> <tr> <td> <p><strong>FCF</strong></p> </td> <td> <p>489</p> </td> <td> <p>769</p> </td> <td> <p>502</p> </td> <td> <p>601</p> </td> <td> <p>52</p> </td> <td> <p>16</p> </td> <td> <p>475</p> </td> <td> <p>972</p> </td> <td> <p>1,010</p> </td> <td> <p>840</p> </td> </tr> </tbody> </table>

We can see that in the previous 10 years, Limited Brands experienced a fluctuating performance with ups and downs in revenue, EPS, and free cash flow. The 10-year growth of revenue, EPS, and free cash flow are 2%, 10.9%, and 5.5%, respectively.  Interestingly, the number of shares outstanding has been reduced over the same period, from 522 million shares in 2002 to only 288 million shares currently. It means that over time, Limited Brands has kept retiring its shares in the market. In the last 5 years, it has spent more than $3.5 billion to repurchase its shares.

Balance sheet big changes

In the last several years, there have been some big changes in the balance sheet. The total stockholders’ equity has been significantly reduced from $2.2 billion in 2008 to only $137 million in the beginning of 2012, and it even decreased to -$515 million. Along with the huge decline in total stockholders’ equity, the long-term debt has increased from $2.9 billion to nearly $4.5 billion. It seems that Limited Brands has shifted its capital structure from equity financing to debt financing recently. With that recent trend, I would expect that Limited Brands would partly rely on debt financing to pay the recently announced special dividends, along with its cash on hands.

Peers Valuation

Limited Brands is trading at $50.66 per share, with a total market capitalization of $14.61 billion. The market is valuing Limited Brands at 9.52x EV/EBITDA. Hanesbrands is valued at a little higher than Limited Brands, at 10.68x EV/EBITDA. Gap is the cheapest among the three, with only 6.41x EV/EBITDA. Limited Brands is paying the highest dividend yield among the three (2%), whereas Gap is paying 1.6% and Hanesbrands is not paying any dividend currently.

Foolish Bottom Line

With the tendency to rely more on debt financing, historical fluctuating performance and the not so low valuation, Limited Brands is not a stock of choice even with the special dividend. Among the three, I would rather pick Gap because of its cheap valuation and the decent dividend yield.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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