Coach Provides Growth and Income in One Bag

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Too often, dividend stocks fall into one of two categories:  either it’s a stock that provides investors dividend growth in the high teens but a miniscule yield; or, conversely, it’s a stock with a market-beating yield that offers little to no growth in the distribution.  A company that offers investors a combination of both has the potential to be a superb investment, and Coach (NYSE: COH) looks to be just that.

2012 in Review

Coach is well-known for its namesake handbags, jewelry, footwear, and accessories.  The company operates in the luxury apparel industry and has a premier brand.  For the fiscal year ended June 30, 2012, Coach reported an increase in net sales of 14.5 percent.  Earnings per diluted share grew from $2.92 in fiscal 2011 to $3.53, representing growth of almost 21 percent.  Coach has performed extremely well over the last few years, with four-year compound annual growth (CAGR) in sales of 10.6 percent.   Meanwhile, CAGR of earnings per share is greater than 13 percent during the same period.  Coach now trades for between 15 and 16 times trailing earnings.

However, investors weren’t pleased with the results.  Coach saw its share price decline from $60 per share at the start of 2012 to its current level of around $55 per share.  In fact, other luxury retailers struggled alongside Coach.  Tiffany’s (NYSE: TIF) stock rose to over $80 per share during the summer of 2011 only to steadily fall since, to its current level of $61. Tiffany has also done well financially, with sales and net income per share each climbing more than 18 percent year over year.  Therefore, it appears that high-end luxury goods continue to sell, despite concerns over the broader economy.  Michael Kors (NYSE: KORS), on the other hand, bucked the luxury retailer sell-off trend.  The company began the year trading at roughly $27 per share and has almost doubled.  Before investors get too excited, it’s worth noting that Michael Kors now trades at a forward P/E of more than 25 times and doesn’t pay a dividend.

Future Growth

Growth in sales and profits at Coach will be driven by the company’s key initiatives going forward.  Most promising among these initiatives is Coach’s plan to increase its presence in emerging markets in which the company is under-penetrated.  Growth potential is most notable for the company in Asia, and more specifically China, where the company plans to open 30 new locations in 2013.  China provided double-digit comparable sales growth for Coach in 2012, and should continue to provide growth for the company as an emerging Chinese middle class becomes more affluent and willing to spend on luxury goods.

In addition, Coach plans to keep growing its retail store base in North America, to expand on its domestic Women’s Apparel business specifically.  The company is executing on its plan to open 25 new stores in North America in 2013 and keep opening stores until it reaches about 500 locations in North America.   This expected growth for fiscal 2013 results in a forward price-to-earnings ratio of only 12.5 times for Coach.

A Competitive, Growing Dividend

Coach also demonstrated a clear intention of rewarding shareholders.  In 2012, the company increased its cash dividend by 33 percent to its current level of $1.20.  Due to its falling stock price, the stock now yields more than 2 percent, a yield that is competitive with the broader market.  While Coach has only been paying a dividend since 2009, the company has raised the dividend three times.  Coach has an impressive three-year dividend CAGR of 58 percent.  That kind of growth is usually reserved for companies with paltry yields, but with a dividend yield of greater than 2 percent, Coach provides both growth and income investors a reason to buy.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach and Tiffany & Co.. 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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