3 Retail Stocks for Dividends and Growth

The U.S. retail industry is in a state of change. Consumers are increasingly shopping online, favoring the convenience of delivery rather than taking a trip to a store.

Many retailers are struggling to adapt, having relied too heavily on malls for traffic. Some retail bankruptcies have already occurred, and more are likely to follow as the trend toward Internet retail continues.

But not all retailers are doomed. We still view many retail stocks favorably, although investors must be selective and focus on stocks that offer a combination of growth, and dividends.

Let's discuss three retail stocks with attractive dividend yields and long-term growth potential.

15 Consecutive Years of Dividend Increases

Home Depot HD was founded in 1978 and since that time has grown into a juggernaut home improvement retailer with over 2,300 stores in the U.S., Canada and Mexico that generate around $153 billion in annual revenue. The stock has a market value of $374 billion, making it one of the larger companies by market capitalization in the U.S.

Home Depot reported fourth-quarter 2023 results on February 20. The company reported sales of $34.8 billion, down 2.9% year over year. Comparable sales in the quarter also decreased 3.5%. Net earnings equaled $2.8 billion, or $2.82 per share, compared to $3.4 billion, or $3.30 per share in Q4 2022.

The company spent nearly $8.0 billion on common stock repurchases in 2023, compared to $6.7 billion in 2022. Average ticket declined 0.3% compared to last year, from $90.36 to $90.07. Additionally, there was a 3.6% decrease in sales per retail square foot, from $627.17 to $604.55.

As of the end of 2023, Home Depot had cash and cash equivalents equal to $3.8 billion. Management issued guidance for 2024 and expects sales growth of 1% due to the 53 weeks in the fiscal year.

We see five-year annual earnings per share growth of 6.0%, consisting of comparable sales in the low-single-digits, a low-single-digit tailwind from buybacks and a potential low-single-digit tailwind from operating margin improvements. Average ticket sales increases will also continue to add to the top line.

Share buybacks will also boost EPS growth. Home Depot spent nearly $8.0 billion and $6.7 billion in 2023 and 2022, respectively. And effective August 15, 2023, the company inked a new share repurchase authorization of $15 billion.

On February 20, Home Depot announced a 7.7% increase to the dividend to $9.00 per share annualized. HD has increased its dividend for 15 consecutive years. 

HD shares currently yield 2.7%.

A Big-Box 'King'

Target Corp. TGT was founded in 1902 and after a failed bid to expand into Canada, has operations solely in the U.S. market. Its business consists of about 1,850 big-box stores, which offer general merchandise and food, as well as serving as distribution points for the company’s growing e-commerce business. Target and should produce about $107 billion in total revenue this year.

Target posted fiscal fourth-quarter and full-year earnings on March 5, and results were quite strong. For the quarter, adjusted EPS came to $2.98, which was a staggering 56 cents ahead of estimates. Total revenue was $31.9 billion, which was 1.7% higher year over year, driven mostly by an additional week in fiscal 2023 compared to 2022.

Comparable sales were down 4.4%, which was 20 basis points better than consensus. Same-day services were more than 10% of total sales, and were up 13.6%, which was led by the company’s very popular Drive Up program. Gross margin was 25.6% of sales, also up nicely from 22.7% a year ago. The improvement in gross margin was from lower markdowns and other inventory-related costs, lower freight costs, lower supply chain and digital fulfillment costs, and favorable category mix.

The company did not repurchase any stock during the quarter, and it continues to have $9.7 billion remaining on its share repurchase program, which we believe will be resumed in the relatively near future.

Target’s competitive advantage comes from its everyday low prices on attractive merchandise in its guest-friendly stores. Target is not recession-proof, as consumers tend to curtail their consumption during recessions. However, it is much more resilient than most retail stocks in such periods.

Target has grown its dividend for more than five decades, making it a Dividend King. The payout ratio is now 47% of earnings for this year, which indicates a safe dividend. 

TGT currently stock yields 2.8%.

Come for the Rotisserie Chicken, Stay for the Dividend

Costco Wholesale's COST humble beginning in a converted airplane hangar has given way to a powerhouse in an industry it helped create. Today, Costco is a diversified warehouse retailer that operates about 870 warehouses that collectively generate about $254 billion in annual sales.

Costco posted fiscal second-quarter earnings on March 7, and results were mixed. The company beat earnings estimates with $3.71 in adjusted profits per share. That was seven cents ahead of estimates. Revenue was up 5.7% year over year to $58.44 billion, but missed by almost $700 million. Adjusted comparable sales were +4.8% in the U.S., +9% in Canada, +8.2% in the International segment, and +5.8% for the consolidated company.

E-commerce comparable sales were up 18.2%. Management noted a shift in the calendar caused a 1.5% headwind for sales in Q2. Membership fee income was $1.11 billion, up from $1.03 billion a year ago. Net income was $1.743 billion, up from $1.477 billion. Merchandise inventory ended the quarter at $17.08 billion, up from $16.65 billion in the prior quarter.

We see Costco’s forecasted growth as straightforward; sales growth will continue to make up most of its predicted growth. Its model does not allow for much in the way of expanding profit margins because its retail pricing is intended to be as low as possible for consumers. We are forecasting 9% EPS growth annually in the coming years as strong sales numbers help drive incremental gains in operating margins.

The vast majority of Costco’s operating margin dollars come from its membership fees, which continue to grow at strong rates, but are a very small fraction of total revenue. This is 100% margin revenue and fuels higher comparable sales, as well as more members and more people in the stores buying.

Costco’s payout ratio is quite low at 26% for this year, and we believe it will remain near or under 30% going forward. The company has the ability to boost the dividend at a much higher rate but has thus far chosen not to. Regardless, Costco’s dividend is ultra-safe, and the company has increased its dividend for 20 years.

COST shares currently yield 0.63%.

At the time of publication, Ciura had no positions in any securities mentioned.