J.C. Penney: Dividend Stock to Watch

May.14.10 | About: J.C. Penney (JCP)

By Carolyn Austin

J.C. Penney Co. (NYSE:JCP) met earnings expectations today for their fiscal first quarter, reporting $0.25 per share, an increase of 127 percent over year-ago earnings per share of $0.11. Income increased 140 percent to $60 million versus $45 million for the year-ago period.

The company improved its gross margins by 90 basis points and operating income by 46 percent (a healthy portion of which was due to reduced pension expense). Comparable store sales increased 1.3 percent.

Myron E. (Mike) Ullman, III, chairman and chief executive officer of J.C. Penney, said:

The first quarter marked a solid start to the year for J.C. Penney as customers responded well to the steps we have taken to reinforce our style authority with fashion sensibility…At the same time, the disciplined approach to managing our business allowed us to deliver strong gross margins, even as we work to increase our top line… Taken together, the balance of 2010 will be an exciting time for J.C. Penney as we focus on expanding our market share and delivering long-term growth.

As part of that plan, the department store chain plans to launch two exclusive merchandize lines this fall and expand its in-store cosmetics line, Sephora.

The company maintained guidance of $1.64 per share for the year. The stock was off by over 1 percent in trading after the earnings release.

Comments: Retail reports this week were pretty consistent, with retailers reporting a pick-up in demand, but not robust buying (translation: consumers are shopping sales, sales, sales). Of course, it’s hard not to shop a sale, as these are ongoing on a daily basis. But overall, retail made a pretty good showing this earnings season. The question is how much longer the gains can continue.

JCP is not executing as well as some others in the retail sector recently, such as Dillard’s (NYSE:DDS), but they have a good management team that delivers steady performance. On the negative side, they reported a negative free cash flow when compared to the year-ago period. With book value estimated at about $20.25 per share, the stock is no bargain. The stock is currently trading near $28.

However, JCP pays a nice dividend of $0.80 per year for a yield of about 3 percent. You can increase the dividend yield by buying below $27. This looks like a good possibility, as the stock is trading below its 13-day moving average and could move to fill the gap at around $25.50.

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Disclosure: No positions