American Eagle Outfitters, Inc. (NYSE:AEO) is a unique player in the retail field because it has no debt. Several factors make it worth a look.
Things to Like about American Eagle
1: No Debt
Throughout the financial crisis, large debt loads weighed on company balance sheets and had serious implications for the firms that let their borrowing get out of control.
Other companies, however, have a history of operating with low debt levels, and many choose to issue no debt at all. Instead of debt, these companies hold cash and short-term, highly liquid assets in order to make acquisitions and fund other investments in future growth.
For these reasons, companies with no debt are defensive plays suitable for investors worried about the possibility of another downturn. With no debt, American Eagle has the ability to withstand downturns in consumer spending better than other retailers carrying high debt loads.
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2: High Current Ratio
The current ratio compares current assets to current liabilities to measure a company's ability to remain solvent. American Eagle's current ratio is currently 3.959, and has been climbing since after the financial crisis of 2008. American Eagle's strong current ratio is ranked in the 90th percentile for apparel stores. This, combined with the lack of debt, gives AEO a very strong balance sheet.
3: Strong Dividend Yield
American Eagle has an $0.44 annual dividend, which at the current stock price works out to a 2.30% yield. Dividends are important for defensive investors because over time, dividend-yielding companies tend to outperform companies without dividends. American Eagle has a payout ratio of 53.01%, which compares favorably to an industry average of 37.36%.
4: Positive Growth
While American Eagle Outfitters was hit by the downturn, it has rallied back with strong growth. AEO has a quarterly year-on-year EPS growth of 42.86%, and the projected 3-5 year EPS growth is 12.21%.
5: Cash Flush
American Eagle Outfitters has $722M in cash, equivalent to approximately $3.66 in cash per diluted share. This provides it with a significant cushion and may in the future be used for capital expenditures.
With good EPS growth, a solid dividend, and absolutely no debt, American Eagle has a unique position in the typically highly leveraged retail industry. Defensive investors looking for a quality company with good dividend and growth potential may do well to give American Eagle Outfitters a look. Another no-debt retailer to check out is Buckle Inc.
It is important to note, however, that at a P/E of 23.76, American Eagle is more expensive than many other retailers. But if you're willing to pay the premium, you can obtain a fairly strong business with zero debt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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