Where Is The Dividend?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For a long time I've followed Bed Bath & Beyond (NASDAQ: BBBY), and wondered why does this company not pay a dividend? If you look at the company's competition, three of their major competitors pay dividends, and in two of the cases these dividends have been raised for many years. Based on the company's most recent earnings report, you can clearly see that Bed Bath & Beyond can afford a dividend, however the company chooses to use its excess cash to repurchase shares. Given the popularity of dividends in today's market, my question is, why is the company unwilling to release this cash flow to investors directly? Let's take a look at the company's most recent earnings report, see what type of free cash flow is being generated, and determine what dividend the company could afford.
With multiple divisions like Bed Bath & Beyond, Christmas Tree Shops, Harmon, and byebye BABY, this retailer is diversified into multiple categories. In the company's most recent earnings report, sales increased 5.13% and earnings per-share increased 23.6%. Unlike some other retailers, the company also saw a positive same-store sales increase of 3%. To give you an idea of how much money the company spends on share repurchases, consider that outstanding shares decreased by nearly 7% over last year. In just the first quarter of 2012, the company repurchased 4.6 million shares for an average price of $66.59. Even with the share repurchases, the company is expanding. Bed Bath & Beyond opened 2 Bed Bath & Beyond stores, 4 byebye BABY stores, and 1 Christmas Tree Shops store. Assuming the company meets analysts targets for the year, what type of dividend could the company potentially pay?
One way to gauge the amount of dividend that Bed Bath & Beyond could pay, is to look at other retailers payout ratios. Two of Bed Bath & Beyond's primary competitors are, Target Corp. (NYSE: TGT) and Walmart Stores (NYSE: WMT). While both Target and Walmart sell many other things, each company has increased its home furnishings business, which is directly in competition with Bed Bath & Beyond. Over the last three years, Target's free cash flow dividend payout ratio has averaged 22% per year. During the same timeframe, Walmart's dividend payout ratio has averaged 38% per year. While both Target and Walmart issue regular dividend increases, even Macy's Inc. (NYSE: M) has paid out a dividend to its shareholders using about 44% of free cash flow over the last three years. With an average free cash flow payout ratio of 34% between the three companies, it's probably safe to assume that Bed Bath & Beyond could afford a similar payout ratio.
If you look at the company's expected growth over this next year, even if operating cash flow grew more slowly than net income, Bed Bath & Beyond still should see an increase in operating cash flow of around 6% to 7%. This is based on the fact that in the last few years, net income has grown by over 60%, while operating cash flow grew at about half of that rate. If this continues, next year's net income growth of over 13%, should turn into 6% to 7% in operating cash flow growth. With this as our baseline, we should be able to assume that for the full-year ending February 2013, Bed Bath & Beyond would generate around $1.3 billion in operating cash flow. The company is saying they expect capital expenditures of around $300 million, which gives us a net of about $900 million in free cash flow for the full year.
Even with a conservative 30% free cash flow payout ratio, the company would be able to afford about $270 million worth of dividend payments. With 277.98 million shares outstanding, this would indicate an annual dividend of about $.97 per share. Given the company's current stock price of nearly $61 per share, this would produce an indicated yield of about 1.60%. This is lower than their competitor's dividends, given that Target pays approximately 2.5%, Walmart pays 2.2%, and Macy's pays about 2.40%. While Bed Bath & Beyond's yield would be lower, it would likely diversify the investor base, as well as open the stock up to additional investors who only buy dividend paying stocks. In particular, given that this 1.6% yield could be achieved by paying out only 30% of free cash flow, it would not preclude the company from continuing an aggressive share repurchase program. While the company clearly could not repurchase the same number of shares, investors would get current income, which they do not receive currently. Bed Bath & Beyond has the highest growth expected of the four companies mentioned. This new payout would not hurt the company's ability to expand in the future. The only question left for investors is, where is the dividend?
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Bed Bath & Beyond. 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.If you have questions about this post or the Fool’s blog network, click here for information.