There are few sectors as bombed out as retail, and department store leader Macy’s, Inc. (M) is no exception.
Macy’s stock price has been nearly cut in half since late July, and the story got worse when Macy’s was forced to close 40 underperforming stores earlier this year. While no one is whispering the word “bankruptcy” just yet, prospects for Macy’s really do look bleak, and the company carries more debt than it should, given its financial health.
But after falling so far so fast, might Macy’s stock finally be too cheap to ignore? Let’s take a look.
To give an idea of just how far the mighty have fallen, Macy’s stock today trades at 2006 levels … fully ten years ago. Outside of the energy sector, it’s hard to find many large companies that have been hit that hard.
Outside of the 2008-2009 meltdown, this make’s Macy’s stock close to the cheapest it has been in nearly 20 years, as measured by the price/sales ratio. Shares were cheaper during the lean years of 2000-2002 … but just barely.
Of course, a lot has happened in the past 20 years. Internet commerce was nonexistent 20 years ago, and now it has become the norm. And even among traditional brick-and-mortar stores, customer preferences have shifted away from large department stores to smaller specialty stores.
Or at least that is the popular narrative. The numbers tell a more nuanced story.
Macy’s revenues, while not growing particularly quickly, have remained stable for several years running, as have profit margins. Gross margins have been around a steady 40% for the past 15 years, higher than all of its department store rivals. This paints a picture of a company that, while not really growing, is not exactly falling apart either.
Looking at per-share data, Macy’s stock actually looks a fair bit better. In addition to raising its dividend from 5 cents to 36 cents per quarter since 2011, Macy’s has massively slashed its share count via buybacks.
In 2007, Macy’s stock had 548 million shares outstanding. Today, it has about 330 million. That’s a 40% reduction.
Revisiting the dividend, there is a lot to like on that front as well. After the slide in the stock price, the current dividend yield is 3.6%. And with a payout ratio of just 35%, that dividend not only looks safe for now but also looks likely to rise.
Playing with the numbers a little, had you bought Macy’s stock five years ago, you would be enjoying a 28.7% dividend “yield on cost” based on your original purchase price.
Now, realistically, I don’t see that kind of dividend growth as being likely going forward. But I do see healthy dividend growth as being likely.
Is there anything not to like about Macy’s at current prices?
Bottom Line for Macy’s Stock
Macy’s stock is cheap. But cheap stocks can get spend a lot of time getting cheaper before Wall Street’s sentiment turns. And given that Macy’s has had a truly rotten year in which it reduced profit guidance twice in a fairly short window of time, Wall Street might not quite be ready to give Macy’s its day in the sun.
Add the fact that the entire market is looking wobbly right now, and Macy’s might not be a stock that you need to run out and immediately buy today.
But in a broadly overpriced market, Macy’s might be a surprise winner.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he had no position in any stock mentioned.
