From the screening room: Last week it was Wal-Mart with an announced dividend increase of around 20 percent.
The obvious question: Who’s next with a Wal-Mart-sized increase?
Using a screen from AnalytixInsight, with the initial parameters of retailers that have borrowing capacity and whose book values are at a discount to peers, the list was rapidly narrowed down from two dozen to just two: Gap and Lowes.
Ignore the discount to peers, and the list would include Tiffany, Advanced Auto, PriceSmart and Big 5 Sporting Goods – all have the financial wherewithal to raise their dividends.
But none of them need to do it, especially in a big Wal-Mart-like way, to snare investors.
Which gets us back too Lowe’s, Home Depot and Gap:
-- Lowes currently distributes 20.26% of its earnings as dividends -- giving the shares a dividend yield of 1.10%. But relative to its biggest peer, Home Depot, its share price performance is fading, its “value characteristics” appear challenged and its book value is lagging.
-- Gap currently distributes 19.65% of its earnings as dividends, giving the shares a dividend yield of 1.76%. While its operating metrics have improved, AnalytixInsight’s model shows that with a book value below its peers, “the buy-side likely sees the company’s long-term growth prospects as fading.”
Bottom line: Margins and cash flow are relatively good compared to their peer group averages. In addition, their leverage and liquidity ratios suggest they can easily service their current debt. These factors, along with their relatively strong 52-week share price performance, indicate that if they decided to do so to woo Wall Street, both could handle doing so by way of a higher dividend
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