Retail May Be The Next Major Dividend Growth Sector (LTD, WFM, KR, GPS, TIF, KSS, WMT, TGT, ANF)

The retail sector has historically not the place for income and dividend investors seeking high payouts.  The reason is simple: razor-thin margins.  Add in the notion that many new retailers are effectively new companies two or three times each year and you can see why it is difficult for this sector to spend too much money paying out shareholders.  Good news seems to be coming for retail sector investors.  We are seeing increasing evidence of large dividend growth in the quarters (or years) ahead.

This week we saw  Limited Brands, Inc. (NYSE: LTD) declare its regular $0.20 dividend, but the retailer also declared a $1.00 special dividend. This regular dividend at $39.80 generates just over a 2% dividend yield as it is.  The $1.00 special dividend generates another 2.5% paid out to shareholders.

Our major companies we have looked at for determining that higher dividends are coming is after reviewing the likes of Whole Foods Markets Inc. (NASDAQ: WFM), The Kroger Co. (NYSE: KR), Gap Inc. (NYSE: GPS), Tiffany & Co. (NYSE: TIF), Kohl’s Corp. (NYSE: KSS), Wal-Mart Stores Inc. (NYSE: WMT), and Target Corporation (NYSE: TGT). Another issue is around Abercrombie & Fitch Co. (NYSE: ANF).

Most of you will think of Whole Foods Markets Inc. (NASDAQ: WFM) as an organic and natural foods grocer.  Forget that notion.  When it comes to how you need to evaluate Whole Foods it should be considered a luxury retail destination.  Whole Foods now pays a dividend with a yield under 1.0% and it has the luxury of much higher margins that traditional grocery stores.  Since the stock is pricey, look for more dividend increases ahead rather than share buybacks.  The company even signaled that it would look at dividend hikes without giving a formal target. The Kroger Co. (NYSE: KR) operates generally on lower margins, yet its dividend yield is about 1.7%.  The difference is that Kroger trades at about 13-times expected earnings against about 30-times expected earnings for Whole Foods.

Gap Inc. (NYSE: GPS) is one that we had big ambitions for dividend investors .  The growth is stalled and the company is mature.  The good news is that the dividend is now north of 2%, but we had expected the dividend to really go up even more.  After the company’s last warning was such a blow, it looks like Gap’s “return of capital to shareholders” is likely to continue via share buybacks.

Tiffany & Co. (NYSE: TIF) is one which we were surprised about a dividend hike.  With the high price of gold and silver, the company has pricing power and price hikes appear to be the norm.  Its new dividend yield was close to 1.65% and we ran the math based upon forward analyst estimates and determined that Tiffany can rather easily keep hiking its dividends ahead.

Kohl’s Corp. (NYSE: KSS) is another large retailer that has buckled to peer pressure this year and finally broke down and initiated paying a dividend.  This was one we expected to join in on the dividend game and it is living up to that.

Wal-Mart Stores Inc. (NYSE: WMT) followed our advice, or at least acted as we figured, by hiking its dividend earlier this year by more than it previously had.  The current $0.365 per quarter dividend compared to $0.3225 and the yield today based upon a $54.75 share price is now 2.66%.  What is interesting is that this fits in with our thesis that Wal-Mart could pressure its peers financially by hiking its dividend.   That, in turn, would force competitors to pay more funds out to shareholders rather than invest in their businesses to compete more effectively against Wal-Mart.

Target Corporation (NYSE: TGT) may raise its dividend very soon as the current yield is “only” about 2%.  When Wal-Mart hiked its payout it had a yield at the time of about 2.8% because its shares were lower at the time.  It is hard to imagine Wal-Mart as a trend-setter today, but this strategy may only amplify that trend.

It is still the case that many apparel retailers and specialty retailers have a dividend of 1% or even less. Abercrombie & Fitch Co. (NYSE: ANF) has had this same $0.175 dividend per quarter all the way back to 2005 and it now yields less than 1% since its shares are up so much around $75.00.  With an annual meeting later this month, perhaps a higher payout is coming very soon.

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JON C. OGG