Dick’s Sporting Goods (DKS) shares shot up as much as 4% on Tuesday morning after its second-quarter earnings came in better than analysts expected. As of this writing, DKS shares are now up 5% year-to-date and 19% in the past year, handily beating the returns of the S&P 500 over the same periods.
While it’s easy to get all riled up about market-beating returns, that doesn’t mean investors should be content simply because one of their stocks is beating an index.
Public companies have a legal responsibility to maximize shareholder value, and in light of the strong second-quarter results, it’s clear that there’s still some “unlockable” value to be had in DKS stock, so to speak.
Let’s take a look at the most recent quarter and why DKS should increase its dividend.
Great Earnings … Now Share Them!
Revenue in the second quarter came in pretty much in line with estimates, clocking in at $1.82 billion vs. expectations for $1.83 billion. That was a 7.9% increase from the second quarter last year, and its 77 cents per share came in 2 cents above expectations for a 14.9% improvement over the year-ago quarter. Dick’s also raised its full-year earnings guidance by a penny, to a range of $3.13 to $3.21.
As for its dividend, Dick’s currently doesn’t boast a sizable one. Even though it increased its dividend at the beginning of 2015 (by a lousy 10%), another, bigger dividend hike is definitely in order.
Walmart (WMT) and Target (TGT), two brick-and-mortar retailers on solid footing, each boast dividend yields approaching 3%. Sure, Dick’s isn’t nearly the size of those guys, and probably never will be, but there’s still room for DKS to become a reliable dividend stock. Dick’s sports a payout ratio of just 17%, well below the exceedingly high ratios of WMT and TGT, which are each in the 40% to 50% range.
Companies very seldom raise dividends twice in one year, so I don’t expect DKS to make such a move until the first quarter of 2016. But Dick’s has more than enough moola coming in to afford cutting investors a fatter check.
Even if DKS doesn’t boost it’s dividend by 15% to 25% in 2016, DKS stock still trades at a rather attractive valuation right now.
It’s not easy to find value in the stock market today, but DKS stock is one of the few names out there that still look like a great deal. Shares trade at less than 15 times forward earnings, and its price-to-sales ratio is just 0.87.
For those who might worry that brick-and mortar retail is a dying breed, don’t fret. There will always be old-fashioned, in-person shopping. Still, Dick’s knows that e-commerce is important, and it’s focusing on growing that segment of its business. Online sales jumped from 6.3% of overall revenue a year ago to 7.3% of overall revenue in the most recent quarter.
With a growing focus on e-commerce, an attractive valuation and plenty of room to grow its dividend, DKS stock is definitely a buy at current levels.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.