Macy’s Inc (NYSE:M) was left for dead by the market. But M stock roared back as a robust Christmas season proved Macy’s could still drive store traffic.
Unlike some retailers, Macy’s has stayed profitable despite the threat from e-commerce players. As the company closes stores and faces falling profits in future years, however, many wonder if Macy’s stock remains a good investment.
But given the company’s assets, profitability, and dividends, Macy’s is poised to generate investor returns for years to come.
M stock bounced back from Amazon-inspired fears
M stock powered higher in Tuesday’s trading session after the company announced new initiatives.
CEO Jeffrey Gennette announced Macy’s will be experimenting with experiential stores, which entail more of a “community hub” than a store. Additionally, they’re working on credit-less loyalty programs and mobile checkout. They also plan to add 100 Macy’s Backstage locations, which are discount stores within existing stores.
Last year, M stock fell to lows not seen since 2010 on fears that Amazon.com, Inc. (NASDAQ:AMZN) sales growth would sink Macy’s and its brick-and-mortar-based peers.
Those fears proved unfounded as the company enjoyed one of its best Christmas selling seasons in years. In its fourth-quarter 2017 earnings report, the company beat earnings estimates by 11 cents per share. It also announced guidance for 2018 of $3.55-$3.75 per share. Analysts estimated only $3.04 consensus before the announcement.
Macy’s still has its struggles.
Store closures continue. Analysts also project profit estimates to fall by nearly 50% by 2020. Still, unlike peers such as J C Penney Company Inc (NYSE:JCP) or Sears Holdings Corp (NASDAQ:SHLD), Macy’s will remain profitable. And Macy’s stands as the fifth largest e-commerce retailer by sales volume. The company recently reported its 34th consecutive quarter of double-digit e-commerce sales growth.
M stock a buy on dividends alone
Still, M stock’s dividend and Macy’s assets alone make the stock a buy.
The company currently pays $1.51 per share in annual dividends. With the current stock price hovering at around $30 per share, the company maintains a dividend yield above 5%. And even if the $1.91 per share consensus estimate on earnings holds for fiscal 2020, Macy’s can pay that dividend from current profits.
Moreover, the market cap of the company stands at just over $9 billion. However, estimates of the value of Macy’s real estate stand between $16 billion or $21 billion depending on the estimate. With short and long-term debt standing at just under $7 billion, the enterprise value stands at around $17.25 billion, which is within the range of the estimated value of its real estate.
This valuation does not account for the nearly 900 million in free cash flow the company generated in the previous fiscal year or the $1.51 per share in dividends paid. Hence, I think M stock stands as a profitable buy, if only for the cash flow produced.
Plus, over time the real estate values should climb, particularly in the more expensive markets served by Macy’s. And unlike Rite Aid Corporation (NYSE:RAD), the company faces no pressure to sell its real estate holdings to stay alive.
The bottom line on M stock
Despite its challenges, investors in M stock appear well-positioned to enjoy both dividends and asset values that have yet to be unlocked.
Macy’s stock took a beating last year amid fears of an Amazon takeover. A robust Christmas season brought life back into the venerable retailer, however, and the stock price rose. Moreover, the company has maintained profits and dividends throughout Amazon’s rise. It has also become a major e-commerce retailer in its own right.
As it stands now, Macy’s real estate holdings alone account for the entire enterprise value of the company. This valuation excludes both cash flows and the generous dividend the company currently pays.
Buyers who purchase now can conservatively expect to collect a dividend and over time profit from increased real estate values, and perhaps, even the revival of Macy’s as a company. Hence, buying M stock should pay off for investors, regardless of how well the company performs or how well they respond to the latest company initiatives.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
