A large dividend should never be the sole reason to invest in a security. The opportunity referenced in L Brands (NYSE:LB), which owns such brands as Victoria's Secret, Bath & Body Works and La Senza, is quite different. This is a traditionally 2%-to- 2.5%-yielding security that is now closing in on a 4% yield (7+%, considering the annual special dividend) due to a declining stock price caused by weakness in retail.
I am not a retail investor and have never purchased a retail stock, but I take notice when prominent brands struggle. Retail names are struggling for multiple reasons: lower foot traffic, evolving consumer trends, increase in competition, and the inability to capitalize on online sales trends, to name a few. However, provided a near-4% yield, it may be worth investing in L Brands.
At the time of writing, L Brands' dividend represents a 3.86% yield. With the annual special dividend of $2.00 delivered in 2015 and 2016, the actual shareholder yield sits at 7.09%.
While operating income is decreasing at Victoria's Secret, L Brands did present comfortable December sales results. Free cash flow is also in range with 2015; the trailing twelve months free cash flow figure is at ~$1 billion. Combined with CFO Stuart Bugdoerfer's comments on the third quarter earnings call, I foresee L Brands continuing its trend of increasing its dividend, as well as paying a special dividend of $2.00. The company is also on pace to deliver higher revenues in a challenging retail climate, although with significantly lower operating income, gross margin, and EPS.
Assuming a 10% dividend increase (note: dividend increased 20% from 2015 to 2016), shareholders buying L Brands today would be purchasing a stock that may pay $2.64, and provide a 4.25% yield ($4.64, 7.48% yield including a $2.00 special dividend) in 2017.
Is It Worth The Risk?
To be clear, I do not view retail stocks as attractive. While as of this writing, companies like Kohl's (NYSE:KSS), Nordstrom (NYSE:JWN), and Gap (NYSE:GPS) are continuing to trend lower and displaying similar dividend yields, my sentiment regarding L Brands is not transferable to residual names.
Victoria's Secret is doing relatively well when compared with similar retailers that depend on mall traffic, and it continues to drive top line growth. With Bath & Body Works holding its own and growing 7% YoY in Q3, solid December retail results, and the introduction of La Senza to the US market, there are catalysts for this stock going into 2017.
There are other risks associated as well. In addition to the company's lower margins, which a fellow contributor covered in detail last month, L Brands just announced stale expectations for the concluding quarter and January. The company announced that it expects EPS in Q4 to be on the low end of its $1.85 - $2.00 range. Management again anticipates lower margin rates, and projects flat YoY sales in January. Depending on the company's full year results and 2017 outlook, these trends and remarks may put further pressure on the stock price.
Down 35% last year, 2017 may be another volatile year for L Brands. However, considering these are iconic brands facing general industry headwinds, while still showing promise, this may be a good point for investors to enter or accumulate additional shares. Victoria's Secret is in the midst of a transition, and Bath & Body Works is showing encouraging results; in context with management focusing on international exposure, and the La Senza brand debuting in the US, there continues to be room for growth. Overall, a healthy cash flow and a 4% dividend yield should make potential volatility easier to endure.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LB over 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.