Dividend Investors Must Keep An Eye On Ralph Lauren

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About: Ralph Lauren Corporation (RL)
by: Robert & Sam Kovacs
Summary

Ralph Lauren has the potential for aggressive dividend growth.

It has solid fundamentals and presents decent value.

However, its future depends on the company's ability to increase revenues and net income.

While I'd like to own the company, I need to see revenues and net income tick up for at least another quarter.

Written By Sam Kovacs

Introduction

As of the today, Ralph Lauren (RL) has a dividend yield of 2.03% and is trading at $123.91 per share. My M.A.D. Assessment gives RL a dividend strength score of 41 and a stock strength score of 97.

I believe that dividend investors shouldn't invest in RL currently. I do, however, suggest the company be placed on a watchlist for a potential purchase next quarter.

Source: mad-dividends.com

Ralph Lauren Corp. is a fashion apparels manufacturer that designs and distributes lifestyle products, including apparel, accessories, home furnishings, and other licensed product categories through department stores, specialty retailers, and its own outlets.

M.A.D. assessments are presented in two sections: dividend strength and stock strength.

You might ask what the difference is between dividend strength and stock strength? A high dividend strength score indicates that the company has a good combination of dividend safety, dividend yield, and dividend growth potential, whereas a high stock strength score is an indicator that the share price is likely to increase in upcoming quarters. Dividend investors can expect to do well by investing in stocks which rank highly in both dividend strength and stock strength.

Dividend Strength

Dividend strength can be broken down into a) dividend safety and b) dividend potential.

Both are equally important, and both will be analyzed within this article.

I will look at RL's payout and coverage ratios to assess dividend safety. The company's dividend potential is measured by looking at the current dividend yield, the dividend's historical growth as well as the changes in the revenues and net income over the recent years.

Dividend Safety

45% of Ralph Lauren Corporation's earnings are paid out as dividends. This is a more attractive payout ratio than 43% of dividend stocks.

Operating cash flow payout also gives a good idea of a company's ability to pay its dividend and gives a more complete picture than simply looking at the earnings payout. RL pays 27% of its operating cash flow as a dividend, putting it ahead of 45% of dividend stocks.

To finish my assessment of RL's payout ratios, I turn to free cash flow payout, which gives an idea of the company's ability to pay its dividend after paying for its Capex. Ralph Lauren has a free cash flow payout ratio of 39%, a better ratio than 54% of dividend stocks.

Ralph Lauren Corporation's payout ratio is satisfying according to these 3 metrics.

27/12/2014

26/12/2015

31/12/2016

30/12/2017

29/12/2018

Dividends

$1.8000

$2.0000

$2.0000

$2.0000

$2.3900

Net Income

$8.15

$5.55

$1.75

$-0.99

$5.36

Payout Ratio

23%

37%

115%

-203%

45%

Cash From Operations

$11.65

$10.01

$12.06

$12.89

$8.70

Payout Ratio

15%

19%

17%

16%

28%

Free Cash Flow

$7.03

$4.92

$8.03

$10.47

$6.15

Payout Ratio

26%

41%

25%

20%

39%

Source: mad-dividends.com

Analyzing interest and debt coverage ratios, along payout ratios, gives us an idea of the payout ratio's stability. If a lot of the company's earnings go towards paying interest, the financial leverage makes the company's bottom line more affected by variations in revenue.

RL can pay its interest 5 times, which is better than 42% of stocks. This level of coverage can be considered sufficient.

Looking at payout and coverage ratios together would suggest that RL’s dividend is relatively safe. However, we can see that the reduction in cash flow these past 12 months has pushed RL’s payout ratios up. This reduction in cash flow must be addressed in the future.

Dividend Potential

I then move on to analyzing the company's dividend potential (i.e.: its ability to pay us a good dividend which grows at a satisfying rate).

Source: mad-dividends.com

Ralph Lauren Corporation's dividend yield of 2.03% is better than 40% of dividend stocks. This last year, the dividend grew 26%, which is a lot higher than their 5-year CAGR of 8%.

Source: mad-dividends.com

Over the previous 3 years, Ralph Lauren has seen its revenues decrease at a -5% CAGR and net income by a -3% CAGR. It is important for a company to continue growing revenues and net income in order to continue paying and important for a dividend investor growing their dividends.

Source: mad-dividends.com

If the company can continue to grow its revenue and net income at the current rate, RL’s dividend has decent potential for growth. Management clearly wanted to make a strong statement with the dividend hike. However, the reduction in revenues and net income is worrying.

When we see the latest results, where revenues grew 5.5% YoY, we want to believe the worst is behind us. But these results will need to persist for another quarter for me to be convinced.

Dividend Summary

The combination of the data presented above gives RL a dividend strength score of 41/100.

If management follows through with its aggressive dividend growth, RL could be a fantastic pick. Yet, we haven’t had a definite confirmation that the worst is behind us.

Stock Strength

When picking on dividend stocks, investors must focus on more factors than dividends alone. To pick the most attractive dividend investments at any given point in time, we must also focus on other factors.

These fundamentals are what determine a company's stock strength score: value, momentum, financial strength, and earnings quality.

To assess a company's stock strength score, I look into the fundamentals underlying these factors separately.

Value

It has been proven time and time again that undervalued stocks outperform overvalued stocks. To assess value, I look at a company's P/E, P/S, P/CFO, and Shareholder Yield. I combine them to give the stock a value score out of 100.

RL’s value ratios are as follows:

  • P/E of 23.12x
  • P/S of 1.59x
  • P/CFO of 14.23x
  • Dividend yield of 2.03%
  • Buyback yield of 0.61%
  • Shareholder yield of 2.64%

These values would suggest that RL is more undervalued than 66% of stocks, which is sufficient. I like to focus on stocks which are more undervalued than the median stock, since it gives me somewhat of a margin of safety.

Value Score: 66/100

I also draw PE lines over a stock chart, very much like Peter Lynch would do while running the Magellan Fund. By doing so, investors get an idea of the company's PE range, and it serves as an indicator of potential downside and upside.

Source: mad-dividends.com

The chart above suggests that RL is trading below its 5-year average PE. This provides upside potential if RL can sustain its recovery. A 30% gain by the end of the year wouldn’t be surprising if the company posts good results next quarter.

Momentum

Buying losing stocks is never a good idea, even if your main motivation is to receive a dividend.

Ralph Lauren Corporation' price has decreased 1.27% these last 3 months, 2.74% these last 6 months, but is still up 16.69% these last 12 months and now currently sits at $123.91.

Source: mad-dividends.com

RL has better momentum than 61% of stocks, which I find to be sufficient. However, we can see that RL is a lot more volatile than the S&P 500. The sharp decline in Q4 2018 would put a chill in any investors back. But the stock has had a good run in 2019, beating the market so far. If the company maintains decent price momentum for the next month or two, it would be well positioned to take off following good results the next quarter.

Momentum Score: 61/100

Financial Strength

Stocks with good financial strength will have reasonable levels of debt, low liability growth, or even decreasing liabilities, and will produce high levels of cash flows in relation to their liabilities.

Financially strong stocks have historically performed a lot better than companies with weak financials. It goes without saying that investors should be extra-careful with stocks which dramatically increase their financial leverage.

RL's Debt/Equity ratio of 0.8 is better than 68% of stocks. Its liabilities have decreased by 2% this last year. Operating cash flow can cover 25.8% of RL's liabilities.

These ratios would suggest that Ralph Lauren has better financial strength than 89% of stocks. This is top notch. The low level of leverage gives the company flexibility and makes it more resilient than most stocks.

Financial Strength Score: 89/100

Earnings Quality

Stocks with high earnings quality will have low levels of accruals and will depreciate their capital expenses quickly. Their assets will also generate large amounts of revenue.

Ralph Lauren Corporation’s Total Accruals to Assets ratio of -15.6% puts it ahead of 70% of stocks.

153.2% of RL's capital expenditure is depreciated each year, which is better than 64% of stocks.

Each dollar of RL's assets generates $1.0 of revenue, putting it ahead of 74% of stocks.

Based on these findings, RL has higher earnings quality than 89% of stocks.

Negative accruals, high levels of depreciation, and decent asset turnover, all things which will have positive effects on earnings in upcoming years. Ralph Lauren has really solid fundamentals.

Earnings Quality Score: 89/100

Stock Strength Summary

When combining the different factors of the stock's profile, we get a stock strength score of 97/100, which is fantastic. Not only does the stock have stellar fundamentals but it also provides decent value and momentum. It would seem like all of the stock’s future hinges on the company’s ability to expand revenues and net income in upcoming years, to return to previous levels.

Conclusion

With a dividend strength score of 41 and a stock strength of 97, Ralph Lauren should be considered by only the most adventurous dividend investors. Good results in upcoming quarters and years could lead to explosive growth in the dividend, but failure to expand top and bottom lines would leave dividend investors with a low-yielding stock with no growth.

I, therefore, recommend that investors place RL on a watchlist, and upon reading next quarter's earnings report, consider initiating a position if the stock yields 1.8% or higher.

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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.