Late to a Turnaround Plan, Staples Now Offers 3.8% Dividend Yield and Upside
Investors don’t seem very enamored with Staples (SPLS) right now, notwithstanding the bounce the stock got after it reported a smaller loss than expected and a smaller decline in same-store sales than analysts had feared.
The fact is that the company has been slower than its rivals, Office Depot (ODP) and OfficeMax (OMX), to embark on a turnaround plan, reflected in the significant outperformance of the latter two companies in recent months. Moreover, even now that it has a plan, there remain questions about whether it’s the right one and whether the company is moving rapidly enough -- the store closures that it has announced won’t generate their full benefit in terms of cost savings until 2015. Moreover, Staples is emphasizing developing its online sales – fair enough, given that this channel accounts for more than a third of sales today, but a risky gambit given Amazon’s (AMZN) dominance of online retailing and its aggressive price cutting.
But while Staples may look like the poster child for all underperforming laggards, that may mean that there is more upside potential than downside risk from this point onward. And the silver lining to the cloud that has hovered overhead for some time is that Staples’s big plunge in price means that its dividend yield is now a very healthy 3.8% -- well above the measly 1% offered by OfficeMax. (Office Depot doesn’t pay dividends.)
Will it continue to have the cash on hand to pay that dividend yield? There doesn’t seem to be any reason why not. Although the company’s cash position has deteriorated, it still has plenty on hand to keep the payout level, if not continue its recent pattern of increasing that dividend still further. Over the last two years, its dividend payments have risen more rapidly than its payout ratio.
The company also has been buying back its own shares at a healthy clip, and has pledged to return some $1 billion to its shareholders via dividends or buybacks during 2012.
The stock trades at only 9 times earnings before the reported loss; clearly investors aren’t giving Staples the benefit of any doubt whatsoever. Indeed, the current market price suggests they are expecting a decline in earnings over the coming years, while the consensus among analysts is that Staples will continue to grow – albeit modestly – in each of the next five years. Individual analysts may well become more bearish as the restructuring proceeds and Staples is hit by the charges associated with store closures both overseas (in Europe) and at home, but unless its margins come under even greater attack from Amazon, those closures prove far more costly than anticipated or the company mismanages the turnaround plan, there’s no reason not to see this as a value stock at its current prices.
Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.