You are running into an issue that you need more clothing attire for an event. Where do you go? I typically reach for the keys to drive right on over to Kohl's Corp. (NYSE:KSS). They have that "thing" that hooks you in - whether it's a coupon code for 30% off, almost every time, or that their clearance racks almost feel like they are giving the clothing items away for free - something about the fact they have everything you need, in a convenient location with a better than low-quality build has always stuck with me. My family, growing up, went to Kohls , quite a bit and would make the occasional trip to Macys (NYSE:M); but would opt for the former before the latter. As I was taking a stroll to find new shoes - my first stop was Kohls , which made me want to analyze this dividend paying company to see if it was worthy of an investment! Time to take a deeper look at Kohl's Corp.
The Stock - Kohl's Corp.:
Here is a brief summary of Kohl's Corp from Google Finance:
"Kohl's Corporation (Kohl's) is an operator of department stores. The Company operates approximately 1,154 Kohl's department stores, a Website (Kohls.com), approximately 12 FILA outlets, and approximately three Off-Aisle clearance centers. The Company's stores and Website sell moderately-priced private label and national brand apparel, footwear, accessories, beauty and home products. The Company's Website includes merchandise that is available in its stores, as well as merchandise that is available only online. The Company's merchandise mix includes both national brands and private brands that are available only at Kohl's. The Company's private brands include Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life. The Company's exclusive brands include Food Network, Jennifer Lopez, Marc Anthony, Rock & Republic and Simply Vera Vera Wang."
I know I use Apt. 9 & Marc Anthony wear, quite a bit - and can confidently state - these items have lasted over 3+ years and running so far. Additionally, Kohl's , hooks you right on in with their Yes2Rewards program and their beloved - spend $50 and receive $10 in Kohl's cash! Who doesn't love extra cash to pick up smaller gifts for your loved ones? Holiday shopping time - Kohl's definitely steps their game up. Watch out Macys , which will be further coupled with the analysis below.
What also intrigued me was the financial well-being of the company and my knowledge of their locations not being primarily based within/attached to/next to a mall setting; as the one's in my state are typically near other shopping centers, such as Target (NYSE:TGT), a grocer such as Kroger (NYSE:KR), etc.. This meant to me that they may not be receiving quite the hits as of late, as other clothing retail stores have felt with the down-turn of the mall industry.
Bottom-line - not only do I shop here quite a bit - but since I am a dividend investor - I will also shop for their stock and see if it's worth of a purchase! Now... onto our beloved Dividend Diplomat Stock Screener.
About Our Dividend Stock Screener
For those of you that are new followers, we run the Dividend Diplomat stock screener to identify potentially undervalued dividend growth stocks to analyze and to even potentially purchase. The Dividend Diplomats like to stick to 3 metrics when evaluating dividend stocks for considerations of a purchase. In our comparison, we also will compare the company we are analyzing to a competitor to gauge how the company performs in their respective industry, in addition to comparing to the broader market. Here are the 3 metrics:
1. Price to Earnings (P/E) Ratio: We like to look for the P/E ratio that is below the S&P 500. The reason why we look for this is to show signs of undervaluation.
2. Payout Ratio: We further like to look for a company with a payout ratio of less than 60%. We choose 60% due to the company having plenty of room to further expand their dividend in future years - it's that simple.
3. Dividend Increase History: Additionally, we analyze companies that have a proven track record of increasing their dividend. We don't go straight for the Dividend Aristocrats, but you have to have recent history, including the prior period, of increasing that yield.
With these dividend stock screening metrics, we may include additional items for consideration; however, these companies must break through the 3 barriers above. Now, onto our detailed analysis of Kohls and their competition of Nordstrom (NYSE:JWN) and Macy's.
KSS Dividend Stock Analysis vs. Competition
1) Dividend Yield: KSS's current dividend yield is at a higher point at 5.61%, which I am sure has to do with their over 14% decline in the last 52 weeks. Too high and too good to be true? Well, M is also up there, not on a coincidence either - as they've dropped 32% in the last 52 weeks. JWN is a solid 3.32%. Who wins here? Well, all are above the S&P 500 yield, so all get a pass. High yields take on more risk if other metrics aren't lined up, such as payout ratios, which happens to be our next metric to take a look at.
2) Payout Ratio: KSS barely misses the 60% payout ratio threshold. With the retail space and the position the industry is in, not sure how I feel about high payout ratios here. M's is lower at 44%, rounded, but even JWN's has crept up to 51%, rounded. KSS, though only a 1% overage, does not pass the payout ratio test.
3) Dividend Growth Rate and History: Sadly, none of these companies are dividend aristocrats (Over 25+ years of increasing dividends). JWN didn't even increase their dividend last year, which to me - counts them out in this battle. KSS has increased for going on 6+ years now, consistently and their 5 year average is 11.46%, nothing to scoff at, but their high payout ratio shows that the DGR going forward wouldn't be as high. Macy's is slightly skewed as they had doubled their dividend from 10 cents to 20 cents in 2012, therefore, excluding that and going to only the last 4 years, the growth rate is just above 17%. M & KSS both have the ability to increase dividends going forward and both have a green light in this category.
4) 5-year Dividend Yield Average: This is a fun metric that we use to show further signs of undervaluation. Probably the most glaring feature here, KSS has a 220 basis point yield above their five year yield average. I don't think I've seen that much of a difference in quite some time! Until M comes in with a 240 basis point moat, I guess? Too funny. This shows signs the yield has increased and the price either hasn't increased in correlation with the dividend increase OR the entities have taken a beating with the stock price. We know that the latter has occurred here. Both are winners in this category, technically, but JWN is not a winner, as they trade below their 5 year yield average.
5) Price to Earnings (P/E) Ratio: This is the fundamental evaluation metric. Currently, KSS is trading at 10.86 price to earnings over upcoming expected earnings per share. M is right there at 8.41 and JWN is under the market as a whole, as well, at 15.25. Interesting. I can say all trade below what the market is doing as a whole, and within this industry - M takes the lowest price to earnings ratio here, however, a ratio of 10.86 from KSS is still showing signs of sheer undervaluation. However - I am concerned here, as I know it has to do with the pricing plummeting big time. I believe I want to see a next 10-Q filing in order to see if they are on par with expecting earnings. Very interesting but to conclude - all 3 show signs of undervaluation, M takes the crown with the lowest P/E ratio, but KSS is right there.
Dividend Stock Analysis Conclusion
Due to the industry that retail is in and the high payout ratio of Kohls , I am going to hold off on making a purchase until at least the quarterly form 10-Q is filed and a read through of the press release to see performance post-holidays and if there are any store closing announcements, which has been a consistent trend. Solid dividend stock metrics above, but with the higher payout ratio can point to either a halt in the growth rate or minimal going forward. Additionally I wouldn't want to be in a position where dividends are cut, as well.
What do you think about these dividend growth stocks? Would you consider adding KSS your portfolio at the current valuations? Or are you passing on adding shares of the company like me?
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.