When it comes to returning capital to shareholders, dividends and stock buybacks generally are considered the top yardsticks. Buybacks can be opportunistic, but committing to a dividend payment is a way that companies signal to their shareholders that they can sustain earnings power for years into the future. Now consider that half or more of investor returns through time are generated from dividends.
Unfortunately, 2015 was the first year in six that the markets did not rise. And now the bull market has been further interrupted ahead of what would be its seventh anniversary. This is putting investors in the mood to seek higher quality stocks, those that have stable or predictable earnings ahead and that pay solid dividends.
Investors often chase dividend stocks, but there is a separate class of companies that many investors have to wonder about. These are the companies that could easily pay dividends and simply refuse to do so. Some of these have great growth stories but are using their available capital for other purposes. So, what happens when great growth stories look mature or begin to fade? This is when companies should use some of that excess capital that has been built up over the years to reward shareholders with dividends.
Companies that can easily pay dividends but refuse to should be considered the dividend sinners, or dividend misers.
24/7 Wall St. has identified seven very well-known companies with a consumer focus that need to pay dividends. They should start in 2016, even if some companies may fight that urge. Again, this means that they will have to manage their businesses for consistent earnings and cash flows. You rarely meet managers and executives who are eager to announce that their dividends are being cut or suspended.
The start of 2016 seems to have put investors into the mood to reflect on their investments and focus mostly on companies treating their shareholders the best. Again, dividends can make up half of all total returns through time.
24/7 Wall St. has written about many companies in recent years that needed to start paying a dividend. Some of them have chosen to do so. These have included great companies like Amgen, Apple, Cisco, Dollar General, EMC, Gilead, Nasdaq, Symantec, Teradyne and others.
The so-called dividend aristocrats are those companies that have hiked their dividends for 25 years in a row. That makes it appropriate to call those companies that can but don’t pay dividends by the name misers or sinners. As of the start of 2016, there were fewer than 80 members of the S&P 500 that were not paying dividends. This was closer to 100 just a few years ago, and some of the S&P components have been changed due to deletions or mergers.
24/7 Wall St. is now calling on these companies to finally start paying dividends. In order to qualify, each company had to have had a stable or at least a predictable earnings floor. For instance, companies losing money should not pay dividends. A company with a price-to-earnings (P/E) ratio of 100 should not be expected to have a huge dividend, as even making the mistake of paying 100% of the income out would generate a theoretical yield of only 1%.
Here are seven dividend sinners (or dividend misers) of 2016 that have a keen focus on consumer spending. A separate list of six technology stocks that need to be pay dividends has also been created. All these companies are S&P 500 stocks, and all have been profitable and are expected to remain so for years ahead. In most cases, their peers and rivals do actually pay dividends.
Bed Bath & Beyond
This retail giant of household products has been public for almost 25 years now. Bed Bath & Beyond Inc. (NASDAQ: BBBY) had a very strong growth story for years, but that was before its recent spate of problems meeting earnings estimates or keeping guidance up. The company has turned to stock buybacks to boost earnings per share (EPS) and shrink its float, but it gets to keep buying back stock at lower and lower share prices due to those disappointing headwinds.
Bed Bath & Beyond shares peaked at roughly $80 but have dipped back to under $50 at the start of 2016. Analysts have all thrown in the towel and revenue growth has all but stalled. Still, with $5.00 or more in EPS power and only $1.5 billion in long-term debt, this retail giant needs to start paying a dividend now that its growth prospects seem to have peaked.
Bed Bath & Beyond shares were recently trading at $44.07, with a consensus analyst price target of $52.79 and a 52-week trading range of $41.71 to $79.36.
Having enjoyed substantial growth from car sales during the post-recession period, CarMax Inc. (NYSE: KMX) still has growth expectations ahead. The problem is that investors no longer want to pay up for this auto dealer. as seen by its share price — falling from about $75 in 2015 to $45 in January of 2016. For a car-related company, CarMax is still not a cheap stock after its sell-off, at about 15 times current year earnings
At least some market pundits expect that the great auto recovery in America may have peaked in 2015 or is close to a peak now. CarMax can still increase its dealership count, and it is buying back stock. It is just time to get with the trend of auto-related companies paying good dividends. The company had almost $9.7 billion in cash and long-term investments at the end of 2015, but it also had $10.3 billion in long-term bank/debt borrowings. AutoNation, CarMax’s public rival, also pays no dividend, but CarMax has a market cap that is about 75% larger.
Shares of CarMax were last seen trading at $45.83, within a 52-week trading range of $41.88 to $75.40. The stock has a consensus price target of $64.06.