Screening Retailers for High Dividends With More Upside Ahead (HD, FL, WMT, SPLS, TGT, SWY, GPS, LOW, JWN, RTH, XRT)

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Investors need to consider one thing about investing in retail.  This is quite likely to be the next bastion of dividend growth for investors seeking income to buffer market volatility in the shares.  This matters, particularly for the retail segment and even more so for the specialty and “cool” apparel retailers because these are effectively considered entirely new retail operations two or three times a year.  Those companies have to perform season after season.

Our current screen yielded nine retailers in different retail segments.  Apparel, discount stores, groceries, home improvement:  they are all there.  We list the companies in order of the size of the dividend yield in descending order: The Home Depot, Inc. (NYSE: HD); Foot Locker, Inc. (NYSE: FL); Wal-Mart Stores Inc. (NYSE: WMT); Staples, Inc.  (NASDAQ: SPLS); Target Corp. (NYSE: TGT); Safeway Inc. (NYSE: SWY); Gap Inc. (NYSE: GPS); Lowe’s Companies Inc. (NYSE: LOW); Nordstrom Inc. (NYSE: JWN).     Lastly, there is the Retail HOLDRs (NYSE: RTH) and the SPDR S&P Retail (NYSE: XRT) for investors consider.

The nine companies pay dividends ranging from 2.1% to 2.9%.  Beyond attractive dividends,  these companies boast additional positive characteristics including: EPS growth this year exceeding 12%; forward PE’s lower than 13; price to free cash flow (P/FCF) per share lower than 28.50; returns on Equity (ROE) greater than 10%.  All boast good liquidity with an average daily trading volume exceeding 2 million shares. As you can see, something for value investors, income investors, and others.

Except where otherwise noted, the source for all performance and financial data is Finviz.com. There is one other thing for income and retail-sector investors to remember.  Some of these have much more implied upside to what Wall Street is targeting.  We evaluated the implied upside to Thomson Reuters analyst targets so that we could weed out those companies trading above their implied value.

The Home Depot, Inc. (NYSE: HD) pays a 2.9% dividend with an earnings-to-dividend payout ratio 45.7%. Home Depot’s  shares closed at $34.53 Friday. Its 52-week price range is $25.82 to $38.82.  Home Depot has an implied upside of about 19% to its consensus Thomson Reuters analyst price target of $41.04. The most recent upgrades in both Lowe’s and Home Depot got it names as one of the “Top 10 Analyst Calls of the Week” this last weekend as well.

Foot Locker, Inc. (NYSE: FL) pays nearly 2.9% in dividends with a payout ratio of 46.6%.
The company’s forward PE is a modest 12.8, but is among the highest among this group of retailers.  At 10.2%, its return on equity (ROE) is among the lowest on this list.  Foot Locker’s  shares closed at $22.82 Friday.  Its 52-week price range is $11.30 to 25.50. Foot Locker, Inc. has an implied 22% to its consensus Thomson Reuters analyst price target of $27.82.

Wal-Mart Stores Inc. (NYSE: WMT) pays almost 2.8% in dividends with a payout ratio of 29.2%.   Wal-Mart’s  shares closed at $52.82 Friday. Its 52-week price range is $46.59 to 57.12.

Wal-Mart Stores Inc. has an implied upside of about 15.5% to its consensus Thomson Reuters analyst price target of $61.00.  For whatever it is worth, that $61.00 price has only been hit once in the last 5-year period.  Wal-Mart is also in that buyout plan which we have argued could even be large enough to eventually almost take itself private if maintained year in and year out.

Staples, Inc.  (NASDAQ: SPLS) pays a 2.6% dividend with an earnings-to-dividend payout ratio 29.7%.  The share price of Staples closed at $15.35 Friday. Its 52-week price range is $14.75 to 23.63. Staples has an implied upside of about 28% to its consensus Thomson Reuters analyst price target of $19.71.

Target Corp. (NYSE: TGT) pays almost 2.6% in dividends with an earnings-to-dividend payout ratio of 24%.  Target’s  shares closed at $46.53 Friday. Its 52-week price range is $46.15  to  60.40. Target Corp. has an implied upside of about 28% to its consensus Thomson Reuters analyst price target of $46.99.