To many investors, Best Buy (BBY) may seem more like a leftover from the dot-com era than a modern portfolio holding. The big box retailer has had its share of struggles in recent years, and is unlikely to ever return to its pre-Amazon levels of profitability. The current share price is nearly 40 percent below the 2006 high.
But there may still be reasons for dividend investors to add BBY to their carts. Below are five charts summarizing Best Buy’s financial situation, and the implications on its dividend.
Chart #1: Signs of Growth
While there is a perception that Best Buy’s sales have been decimated by the Amazon-fueled e-commerce boom, the company’s financial reality is more stable. While meaningful growth certainly isn’t present — and may be unlikely to ever return to the retailer — revenue has been fairly steady over the past few years. Domestic revenue and bottom line operating income both increased in fiscal 2015.
Data Source: SEC filings. Reflects fiscal years ended January 31, 2015 and February 1, 2014.
Best Buy’s revenue growth certainly isn’t ideal, but it is moving in the right direction.
Chart #2: Discount Sale
Best Buy stock is relatively cheap — its forward price-to-earning ratio is just 12.2x — but the standard valuation metrics don’t account for the significant amount of cash held by the company. Best Buy has about $6.40 of cash per share on hand (net of long-term debt), which represents almost one-fifth of the current share price. So the non-cash component of the current share price indicates even smaller multiples relative to key financial metrics.
Adjusting this cash out of the numerator of various valuation metrics makes the stock appear rather cheap.
Data Source: FinViz, SEC Filings. As of June 4, 2015
Chart #3: Dividend Growth Potential
Best Buy currently has a dividend yield of approximately 2.7 percent, which is considerably higher than the S&P 500 but well below many popular dividend payers. And while the sluggish top line revenue limits long-term growth potential of the payout, there is certainly some room to climb.
Best Buy had a relatively low payout ratio — dividends as a percentage of net income — of 13.7 percent during its most recent fiscal year. So even holding earnings steady could allow the company to grow its payout over the next several years.
Data Source: SEC filings. As of January 31, 2015.
The current cash balances could fund more than 15 years worth of dividend payments.
Chart #4: Merry Christmas?
Best Buy is hugely dependent on a few weeks of the year. Like many retailers, a significant portion of revenue comes during the holiday months.
Data Source: SEC filings. Reflects quarter ending in each month
With the economy continuing to add jobs and generally exhibit signs of strength, there is reason to be optimistic that the 2015 holiday season — which is somehow only a few months away — will be a good one.
Chart #5: Amazon Sales Tax Creep
Once upon a time, Amazon (AMZN) and other online retailers offered a huge advantage over brick-and-mortar retailers such as Best Buy — no sales tax. Slowly but surely, however, states have begun to claw back this lost revenue; Amazon now collects sales tax on items shipped to 25 states. That list includes California, New York, Florida, and Texas, as well as many of the other more populated states. Now just 63 million Americans live in states where Amazon does not collect a sales tax.
That number will drop by another 5 million in 2016 when Amazon begins collecting sales tax for items delivered to South Carolina.
Best Buy is no longer a growth stock — not by a long shot. But it remains solidly profitable, relatively stable, and flush with cash. Though it lacks the appeal of today’s high-flying tech stocks, it has the potential to deliver meaningful amounts of cash to investors over the next decade if the current management team can simply sustain current levels of profitability. Warren Buffett might view the stock as an ugly and discarded cigar butt — perhaps with one puff still left in it.
This article, The Bull Case for Best Buy, in 5 Charts, first appeared on Dividend Reference.