Dillard's: Dividends, Buybacks And Bears - Oh My

| About: Dillard's Inc. (DDS)

When Dillard's (NYSE:DDS) announced that it would pay out a $5 a share special dividend last Monday, the stock jumped accordingly. Subsequently the bears began to circle like vultures with shorting on their minds, as the shares hit a new 52 week high of $89.93 last week. However, experts say that you should never short a stock just because you think that it is overvalued. Instead, only short stocks where there is something fundamentally wrong with the company. Otherwise you could lose multiple times your original investment.

For instance when Apple (NASDAQ:AAPL) released the new iPhone5, there were major problems that expert traders recognized immediately. Quality, labor and production problems can mean that something is fundamentally wrong. In hindsight we see that the shorts won that Apple battle, at least short term. Nothing is ever guaranteed when trading shares or options one way or another, however serious problems at a company can provide lucrative shorting opportunities.

But does Dillard's have these same type of problems? I don't think so. This is a classic case of some investors believing that the shares are overvalued. Consider that the short interest in the company has dramatically dropped in the last year from a high of almost nine million shares last January to just over two million two weeks ago according to NASDAQ:

Settlement Date Short Interest Avg Daily Share Volume Days To Cover
11/15/2012 2,206,387 571,368 3.861587
10/31/2012 2,273,551 382,104 5.950084
10/15/2012 2,526,234 424,175 5.955641
9/28/2012 2,571,907 479,718 5.361289
9/14/2012 2,703,164 399,944 6.758856
8/31/2012 2,948,502 390,881 7.543222
8/15/2012 3,739,305 691,527 5.407316
7/31/2012 3,642,008 666,260 5.466346
7/13/2012 3,960,926 706,613 5.605510
6/29/2012 3,888,500 707,606 5.495290
6/15/2012 4,260,336 803,249 5.303880
5/31/2012 4,446,274 851,296 5.222947
5/15/2012 5,559,328 1,530,753 3.631760
4/30/2012 7,391,806 583,899 12.659391
4/13/2012 7,663,352 654,791 11.703508
3/30/2012 8,029,101 655,030 12.257608
3/15/2012 7,223,852 927,326 7.789981
2/29/2012 7,146,794 1,331,132 5.368960
2/15/2012 8,364,940 828,438 10.097243
1/31/2012 8,355,544 654,581 12.764721
1/13/2012 8,815,447 1,157,706 7.614582
12/30/2011 7,538,819 886,893 8.500258

This is a very bullish sign. As you can see from the chart below, the shares have been on a steady incline since the economic woes of 2008. So it is safe to assume that many of those shorts were caught in a major short squeeze. Consider that nine million shares is a big chunk of the public float which is only 25 million shares. To the untrained eye, the dip in 2008 was due to problems with the company which sent shares plummeting.

Chart forDillardBut that dip hit the entire U.S. economy, including other retailers like Macy's (NYSE:M) and J.C. Penney (NYSE:JCP). One year later, Dillard's actually recovered faster than those same retail chains, and the other major market indices. However, according to the chart below, J.C. Penney (Green) never really recovered:

Chart forDillard

One reason for this is that Dillard's has been aggressively buying back its own stock for over a decade. And it has paid off for investors. At the end of Q3 2005 there were 79 million company shares outstanding:

During the 13 weeks ended October 29, 2005, Dillard's repurchased $78.4 million of Class A Common Stock under its $200 million share repurchase program approved by the board of directors in May of 2005. Share repurchases during the 39 weeks ended October 29, 2005 under the new plan and the previously existing $200 million plan totaled $100.9 million. At October 29, 2005, the Company had 79.0 million shares of its Class A and Class B Common Stock outstanding.

And now, seven years later, the total dilluted share count is 48 million. That is a change of 30 million shares. This makes share value go up dramatically, and the P/E go down. Right now the Price to Earnings ratio is at 13.96, with a forward ratio of 12.59, which means that the shares will probably be going even higher in the future. Brilliant buyback plans can be very beneficial to long term shareholders. However they can also be a bear trap for unsuspecting shorts.

The next thing to watch for is a split. In June of 1992 the share price hit record highs in the $120s, and the company offered a 3 for 1 split. This caused the price to jump to almost $50 a share (3 shares = $150) in a couple of months. The current share price is nearing those historical highs that caused the spit twenty years ago:

Dec 1, 1992 48.01 49.97 45.23 48.28 326,000 41.50
Nov 2, 1992 40.62 48.86 39.16 48.86 501,900 41.99
Oct 1, 1992 35.77 41.10 34.07 40.62 380,500 34.91
Sep 24, 1992 0.02 Dividend
Sep 1, 1992 33.33 36.60 32.60 35.77 283,500 30.74
Aug 3, 1992 36.35 36.48 31.87 33.81 413,800 29.04
Jul 1, 1992 35.99 36.96 29.08 36.48 714,000 31.33
Jun 24, 1992 0.02 Dividend
Jun 8, 1992 3: 1 Stock Split
Jun 1, 1992 120.63 124.87 32.94 35.75 420,000 30.70
May 1, 1992 115.30 123.05 114.33 120.75 400,200 34.55

Splits can keep the shares from appearing over-valued, which attracts the bears. However, the more shorts there are in the trap, the higher the shares will go when it comes time to cover. This does not mean that the stock won't drop. There is a lot of volatility in the market due to the fiscal cliff. And judging from some of the statements being made to the press by lawmakers, there is a real possibility that we will go over it on January 1.

Consider the investor that bought 5,000 Dillard's shares for $3 each during the 2008 dip. The original investment which cost $15,000 is now worth almost half a million dollars four years later. And their special one time dividend this month will be $25,000. Selling just half of those shares, and collecting the dividend, immediately puts that person into the over $250,000 a year bracket. Even if there was no other income. So, there will be a lot of these investors that will be selling to avoid those implied future capital gains taxes in 2013. And since the stock will go ex-dividend on December 5, there will be a lot of short term investors that will begin selling on that date.

How low will the price go? The shares have only barely dropped below the 50 day MA twice this year. However it usually recovers very quickly to stay comfortably over that line (green). This means that the shares could drop below $80 a share, and possibly to the 200 day MA (Red) of $70:

Chart forDillard

This is what the shorts are looking at, and counting on. But remember that there is nothing fundamentally wrong with the company. So in spite of the fiscal cliff, Dillards may continue to produce surprise earnings in the future:

Quarterly Earnings Surprise History
Quarter End
Per Share*
EPS* Forecast
Oct2012 11/08/2012 0.96 0.75 28
Jul2012 08/08/2012 0.63 0.49 28.57
Apr2012 05/10/2012 1.88 1.67 12.57
Jan2012 02/23/2012 2.21 2 10.5

I have been studying Dillard's stock for over ten years now. And I will admit that the impending gloom and doom had me concerned about all retail companies. Because if we do go over this cliff, it will take big chunks of discretionary income from consumers. But after looking at Dillard's current inventory mix, it is obvious that the company is aggressively targeting the more upscale customer. This strategy has been in place for years. By positioning flagship stores, like the one at Northpark in Dallas Texas, adjacent to Barneys New York and Neiman Marcus, Dillard's can attract those upper and upper middle class customers that may find the luxury stores too expensive due to less available spending money. And that particular Dillard's store carries a multitude of top designer labels for men and women at very competitive prices.

The company also has a store at the Shops at Willow Bend in Plano, Texas which is adjacent to another Neiman Marcus store. It also carries a lot of the same brands as stores like Saks Fifth Avenue (NYSE:SKS). Eileen Fisher, BCBG, and Michael Kors set Dillard's above other moderate retail chains such as Sears (NASDAQ:SHLD), Kohls (NYSE:KSS) and J.C. Penney. It is rumored that the Dillard's at Scottsdale Arizona has one of the largest Missy Lauren by Ralph Lauren Departments in the country. And Dillard's has numerous private label brands such as Antonio Melani that rival many of the top designers.

Another source of income the company has is its ability to lease space within its stores. This "partnership" with some of its brands is due to the fact that, unlike its competitors, Dillard's owns most of its own buildings. So, if you still want to short this retail giant, go for it. Just keep in mind that when the shares drop, it will be a buying opportunity for many investors. And the biggest share buyer of all will be the company itself. Remember, as each of those shares is retired, the price will only shoot higher. And that is when the shorts will have to cover.

Disclosure: I am long DDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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