The Buckle: Interesting Even Without Growth

| About: The Buckle, (BKE)

Summary

The Buckle has had an exceptional past, with a very large cash component over the years.

More recently earnings have been declining along with the share price.

This article looks at various scenarios for the security and highlights why a high payout can be important.

On the quantitative side, Nebraska-based retailer The Buckle (NYSE:BKE) looks pretty interesting. In a world where debt is the norm, this company holds itself as a financial standout. As of the most recently released quarterly report The Buckle had cash and cash equivalents of $153 million against total liabilities - both current and long term - of $139 million. In other words, the company could wipe out all of its liabilities with cash and still have hundreds of millions left over in short-term investments, inventory, property and other assets.

Perhaps equally impressive has been the company's commitment to paying both common and special dividends over the years. Here's a look at The Buckle's payouts dating back to 2006:

In viewing the above table, you can note a variety of items. First, you can see that the common dividend has been steady and generally increasing over the period. Next, as a result of a focus on special dividends rather than share repurchases, the "special" payout has more or less been the norm. And not only that, but often this payment has been much higher than the common one. The average payout ratio during this period has been around 90%.

Of course over the long-term a company can only pay substantial dividends through a couple of levers: balance sheet flexibility or strong underlying profit generation. The Buckle has more or less kept its balance sheet flexibility intact, while the business has performed quite well. Here's a look at the business and investment results of the company from fiscal year 2005 through 2014:

You can see that in the past the strong dividend component was supported by excellent business results: nearly 10% revenue growth coupled with 13% annual earnings-per-share growth. Moreover, shareholders saw even better results as the P/E ratio expanded and the dividends, both common and special, continued to pour in.

It's easy to see that The Buckle had been an exceptional investment in the past - rewarding shareholders via substantial cash payouts and a strong improving business.

More recently this expectation has come into question. The historical quantitative side looks great. It's the quality of the business, and in turn what that could mean for future growth, that is much less unknown. On the qualitative side it's not inevitable that The Buckle must sell enough jeans to remain profitable and pay its common or special dividend. The industry is notoriously finicky and past success does not automatically earn a company future rewards.

This sentiment is presently being reflected in a couple of ways: the business results and the share price. In 2005 The Buckle earned around $1.10 per share. By 2011 this number was closer to $3.20, and that's even with a slight uptick in the number of common shares outstanding. In 2012 earnings hit $3.40, but since then things have been going downhill: near $3.40 in both 2013 and 2014 before earning closer to $3 last year.

Today analysts are anticipating that the company could earn "just" $2.60 for this year. And the share price has certainly reflected this downtrend. Shares were trading hands in the upper-$50s during 2013 (representing an earnings multiple near 16 or 17). As I write this shares have declined all the way to $25 (indicating a forward expected multiple under 10).

So the question becomes whether or not the company will "forever" decline, or if there's a bit of ebb and flow involved in the business. To be frank this is largely a personal opinion. No one knows the future, so it's important to remain true to your personal expectations. Still, we can work through a few scenarios to get a better feel for the types of returns that could be had in different situations.

Let's start with a reasonably upbeat situation. It depends on where you look, but I've seen intermediate-term growth estimates ranging from 0% to the high single digit range on an annual basis. Let's use 5% as a starting point.

If we begin with the expectation of $2.60 in earnings-per-share this year, here's what the next half decade could look like:

Year 1 = $2.60

Year 2 = $2.73

Year 3 = $2.87

Year 4 = $3.01

Year 5 = $3.16

Obviously this is merely a baseline to begin thinking about the security, as the actual results will most surely vary dramatically. Should shares trade hands near their historical average over the last decade - call it 13 times earnings - this would equate to a future share price of about $41.

Ordinarily you'd have to model future share prices along the way to account for the effect of share repurchases, but that hasn't been the case with Buckle. We'll keep in simple and suggest that the security pays out 80% of its profits in the form of common and special dividends - a rather robust rate, but easily below what has actually occurred in the past.

In this scenario you would anticipate collecting $11.50 or so in dividend payments during the five-year period, bringing your total expected value to $52.50 or thereabouts, using the above assumptions. Based on a share price near $25, this would equate to total returns of about 16% per annum. That's a very good result for more or less average growth expectations. The Buckle would still be earning less than it did in 2011, 2012, 2013 and 2014, yet the returns could be quite impressive.

Let's move on to a less upbeat scenario. Instead of reasonable growth, many anticipate that The Buckle may not growth at all. In this scenario you would start with the expectation of $2.60 in earnings and end the five-year period with this number as well. Estimating future earnings multiples are obviously difficult to predict, but it's also important to remember that this is simply a baseline.

Should shares trade at say 11 times earnings in this scenario - below the company's historical mark, but slightly above today's - this would equate to a future share price of about $26. The majority of your return would be a function of the dividends received. Using the same 80% payout results in the expectation of receiving $10.40 or so in common and special dividends during the period.

Expressed differently, in this scenario you might anticipate total returns on the magnitude of 8% per annum. That's a rather solid result for a company that does not improve. Moreover, the vast majority of this would result from the cash component alone.

Finally, let's take a look at a fairly downbeat scenario. Instead of 5% growth, let's see what -5% declines could look like:

Year 1 = $2.60

Year 2 = $2.47

Year 3 = $2.35

Year 4 = $2.23

Year 5 = $2.12

In this situation, earnings closer to $2 rather than over $3 would be anticipated. Given this trend, it would not be unfair to suggest that the multiple investors would be willing to pay could be lower. So far we've assumed 13 times earnings for reasonable growth and 10 times earnings for no growth. For this example, let's use just 7 times earnings. In this situation you'd have an expected share price of just under $15.

That looks to be a rather unfortunate result. Today shares trade around $25 and five years later you could be looking at $15. Of course we haven't yet considered dividends. Using the same 80% payout ratio, you would expect to collect $9.50 or so in dividend payments during this time. Expressed differently your total anticipated value would be around $24 in this scenario, representing an annualized loss of just under 1% annually.

Now it should be underscored that whether or not you invest in the company should be a result of determining if you're happy to partner with the company over the long term and not what any given assumption suggests could be your expected return. However, the above scenarios do provide a bit of insight once you develop your own expectations.

It can be instructive to work out the math behind your assumptions. If you suspect that the company will decline forever, naturally you can find better places to invest. Which, by the way, is a perfectly rational stance to take, especially given a finicky industry. However, if you suspect there's a middle ground for the company - say normalized earnings power of $2.50 or $3 per share - the above illustration ought to be interesting.

It shows you that just a little bit of growth can translate to exceptional returns as a result of a reasonable starting valuation and above average dividend yield. It highlights the concept that even a "no growth" situation could turn out well. And it even demonstrates that negative growth may not be the end of the world. If The Buckle starts earning say half of what it was, that could cause some intermediate-term angst. Otherwise, the steady common dividend and frequent special payout create a higher and higher "loss threshold" as time goes on.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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