I can’t believe I wrote that headline, but it’s true. Somehow, Best Buy Co Inc (BBY) has survived the Amazon.com, Inc. (AMZN) invasion and become a fairly reliable dividend retail stock.
![Best Buy Co Inc: BBY Is Actually a Top Dividend Retail Stock](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
It’s nuts, because I had given Best Buy stock up for dead a few years ago. Circuit City blew up, so why not BBY? Everyone knew that you shop for stuff at Best Buy and then buy it cheaper at Amazon.
Yet BBY stock has survived and even thrived, by reinventing itself around its “store within a store” concept, and “ship from store” programs.
BBY Stock by the Numbers
While earnings weren’t good this quarter, BBY stock has the free cash flow necessary to pay dividends for quite some time.
BBY reported $0.44 earnings per share. That was actually up 19% year over year and even beat the $0.35 consensus. Revenues came in higher than estimates also, at $8.44 billion, ahead of the $8.33 billion guess. Still, that was down about 1.3%, and those all-important comps fell 0.1%.
Now, Best Buy has also benefited by not ceding the online environment to Amazon. BBY, to its credit, really went after the online space and online comps exploded 24% to $832 million — and that’s a mere 10% of revenue.
BBY is struggling internationally, with revenues off 8% to $614 million, partly due to Canada not faring well and those lousy foreign exchange rates.
Yet it’s the cash flow that is most important to this story. Gross profit was actually up a tiny bit to $2 billion, with a 12% rise in adjusted operating profit of $245 million.
So despite the tough times it had a few years back, it is rather amazing to see a cash hoard of $1.85 billion offset by only $1.33 billion in debt. Yes, BBY stock has more cash than debt.
It also generated $350 million in free cash flow and paid out about 75% of it as a dividend.
What I don’t like is how management wants to spend a billion dollars in the next two years on — you guessed it — buybacks. I HATE that. Just increase the dividend! It will attract more dividend investors than buying back stock on a company that is arguably expensive. Net income before last year’s $170 million restructuring charge fell about $50 million to $229 million, after all.
So at $32 per share, does it make sense to take a bite of BBY stock in order to earn that 3.5% dividend? I think you could do worse, although you could also do a lot better. What we see is that Best Buy has a 52-week low of $25 and a high of $39. You’d be buying in towards the lower end of the range. That limits downside risk somewhat.
The dividend seems sustainable, and the stock may recover, adding capital gains to your pot.
I think this is a coin toss. You could go long here, and perhaps sell some covered calls to lower your effective buy-in price. For example, June options are going for about 3%, which would knock almost a full dollar off your price.
Given that there is a short-term trade opportunity here as well to $40, it may not be a bad place to dip in a toe.
As of this writing, Lawrence Meyers had no shares in any company mentioned.