Retail might be changing, but if Sears Holdings Corp (NASDAQ:SHLD) can hang on when it’s easily the biggest mess of the mainline department stores, I have to believe that Macy’s Inc (NYSE:M) isn’t going anywhere. As retail stocks go, Macy’s stock is attractive for several reasons. Here are three I believe make it the underdog buy of the week.
Reason No. 1 to Buy Macy’s Stock: Dividends
If you’re an income investor, it’s possible that Macy’s stock is on your radar because of its 5.2% yield. InvestorPlace’s Will Healy recently said it’s worth buying for the dividend alone.
He’s not wrong.
The company currently pays an annual dividend of $1.51. In 2017, it paid out $459 million to shareholders in dividend payments representing about 30% of its net income, which at $1.54 billion, was the company’s highest of the past five years.
Macy’s has increased its annual dividend every year since 2010, a compound annual growth rate of 33.5%. It’s the growth rate you should be concerned about, not the yield.
Reason No. 2 to Buy Macy’s Stock: Free Cash Flow
It’s possible to pay dividends without free cash flow by either using cash on the balance sheet or taking on more debt. But dividend payments are most secure when paid out from free cash flow.
In 2017, Macy’s generated $1.2 billion in free cash flow, almost three times the cash required to pay out its annual dividends. That’s a reassuring financial metric if there ever was one.
Over the past decade, Macy’s free cash flow has been greater than $1 billion on seven occasions, suggesting its dividend payment is more than secure and likely to continue to rise.
From a valuation perspective, its free cash flow yield is 9.0% — $1.2 billion divided by (market cap of $8.9 billion plus $5.9 billion in long-term debt less $1.5 billion in cash) — putting it in value territory.
Add in the fact it’s got between $16-$21 billion in real estate and we’re talking about a business that’s hardly finished.
Reason No. 3 to Buy Macy’s Stock: Real Estate
Macy’s strategic alliance with Brookfield Asset Management Inc. (NYSE:BAM) continues to unlock value from its real estate holdings.
Brookfield is one of the biggest alternative asset managers in North America, with significant real estate experience and the know-how to deliver win/win results for shareholders of both companies.
In February, Macy’s agreed to sell seven floors of its State Street store in Chicago to Brookfield for $30 million. Brookfield is converting those floors to office space. And Macy’s will benefit from the upside value creation generated by converting the space to its best use.
Brookfield has identified 50 properties where it could add value. In each instance, the intention is to create a better customer experience for Macy’s customers.
Very few real estate companies can match what Brookfield does. This is a win/win situation.
Bottom Line on Macy’s Stock
Investors generally consider Nordstrom, Inc. (NYSE:JWN) to be the best-run department store in America. But Macy’s actually has better margins and higher same-store sales.
Wrap all that up in a nice little ball and you’ve got a dividend value investor’s dream stock.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.