Nordstrom, Inc. (NYSE: JWN) the leading fashion specialty retailer, announced its quarterly dividend of $0.33/share on Feb. 26, 2014 representing an increase of 10% over the prior quarter's dividend of $0.30/share. Having a strong business model and the ability to generate cash as a business, the company has a strong track record of consistent dividend growth and has increased its dividend by 106% in the past five years. Its potential to generate growth in earnings and cash has increased investors' confidence over the year which can be seen in its share price performance. The company's stock has gained around 274.9% over the past five years. The recent dividend increase has continued this trend as Nordstrom stock gained 3% since the announcement.
Nordstrom is a leading fashion specialty retailer founded in 1901 as a shoe store which now operates more than 260 stores in 35 U.S. States, including 117 full-line stores, 140 Nordstrom Racks and Jeffrey boutiques. Its long-term strategy is to improve customer experience by expanding its online retailing presence, making continued capital investment in its existing stores as well as expanding into new markets which include Canadian cities that should help create multiple growth opportunities. The company is focused on making improvements within each individual channel. Furthermore, in order to create a flawless customer experience, it continues to leverage technology, inventory access, its Nordstrom Rewards program, supply-chain logistics, merchandise returns and marketing across the company.
This strategy allows Nordstrom to generate consistent growth in both its top and bottom lines which has resulted in a massive amount of positive cash flows. Consequently, the company has been able to return significant cash to shareholders both in the form of dividends and share repurchases.
A Look at Financial performance
Last week the company announced its Q4 and fiscal 2013 results. The results once again demonstrated Nordstrom's potential to generate consistent top- and bottom-line growth. The company increased top-line growth by 3.4% which brought net sales for the year to $12.2 billion. Its same-store sales increased 2.5% and Nordstrom Rack same-store sales increased 2.3%. Top-performing merchandise categories were Men's Shoes, Cosmetics, and Women's Apparel. Direct same-store sales augmented 30%, on top of past year's growth of 37%, mainly driven by an expanded merchandise selection and investment in technology to enhance customer experience. Nordstrom Rack sales increased by $294 million, or 12.0%. Consequently, its earnings per diluted share of $3.71 exceeded the company's full-year guidance of $3.65-$3.70.
In this current year, Nordstrom plans to continue to invest between $840 and $880 million. The majority of the investments are to fuel online and Nordstrom Rack growth as well as the planned entry into Canada. The company also plans to accelerate Nordstrom Rack's store expansion and looks to increase technology investments to increase customer service and experience. With the expansion in place and a continued investment in technology, it is seeking 5% to 6% in top-line growth while bottom line is predicted at $3.70/share to $3.90/share.
Dividend and Cash Flow
The company consistently increases its dividends; the latest increase was 10% which took its annual dividend to $1.32/share. Nordstrom' potential to generate strong cash flows allows it to make consistent increases in its quarterly dividends as evidenced by its operating cash flows which have provided full cover to its dividend payments. In the past year, the company has generated $1.32 billion in operating cash flows, capital expenditure was at $803 million and dividend payments are only at $234 million. Consequently, it has a large amount of free cash flows which stand at $324 million.
Thus, after paying dividend and making investments in growth opportunities Nordstrom has sufficient cash to make share buy backs. The company continues to work on a buyback program after having repurchased 2.5 million shares in Q4. With the predicted growth in its top and bottom line, the company's cash generating potential should continue the trend of increasing dividends. Its payout ratio of only 31% offers a lot of room to make continued increases in dividends.
The company has established strong foot prints for future growth with its continued investment in technology and its plan to enter new markets. Nordstrom is in a strong financial position to keep returning significant cash to shareholders. Despite all this, I do not recommend to initiate a new position in the company as it is trading above its fair value estimate of $58/share.