Bed Bath & Beyond (BBBY) hikes dividend by 20%, but payout ratio is too low

Bed Bath & Beyond’s (NYSE:BBBY) dividend was increased by 20%.  Its overall yield is 1.53%. The firm started paying a dividend in 2016.

Bed Bath & Beyond is one of the largest operators of retail stores focused upon home related items.  The firm sells a wide range of products for the home including bed linens, bath, kitchen, housewares, home furnishings, and other consumables. It primarily operates under several brand names including Bed Bath & Beyond, Christmas Tree, andThat!, buybuy BABY (Baby), PMall, and World Market.  The firm was founded in 1971 and is based in Union, New Jersey.

Bed Bath & Beyond has maintained a one-year growth rate of dividends of 20 percent. Bed Bath & Beyond currently ranks 2nd in dividend yield within the large cap consumer goods, home furnishings & fixtures category. The quarterly dividend for the July payment will be $0.15 versus the prior year rate of $0.125 per share. Bed Bath & Beyond is not a member  of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on July 18, 2017, to shareholders of record at close of business on June 16, 2017. Bed Bath & Beyond Inc. is currently priced at $39.20. Listed in the table below are the quarterly dividend payments since 2016.

Date Quarterly Dividend
7/18/2017 0.15
3/15/2017 0.125
12/14/2016 0.125
9/14/2016 0.125
6/15/2016 0.125


Analysis of Bed Bath & Beyond is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 1.53% 439
Dividend Growth (3-7 year avg) NA NA
Forward P/E 8.80 12
S&P Financial Rating BBB+ 401
Beta 0.90 191
Total Score NA
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
1.53% NA NA 86.30 0.45 0.40 1.50 0.90% 1.53%

Positives;

  • Bed Bath & Beyond maintains an investment grade rating of BBB+.
  • Bed Bath & Beyond is trading below its ten-year average price/sales (P/S) ratio.
  • Bed Bath & Beyond maintains a beta of 0.90, lower than the average company.

Negatives;

  • Bed Bath & Beyond’s dividend yield is below that of the S&P 500 Index.
  • Bed Bath & Beyond has paid out a dividend for only 1 year.

Latest Earnings & Overall Analysis:

Bed Bath & Beyond issued its earnings data on April 5th. The company reported $1.84 EPS for the quarter, topping the consensus estimate of $1.77 by $0.07. Sales grew modestly to $3.5 billion, up 100 million from the previous year. Comparable-store sales advanced by about a half percent.  The strongest growth was in sales from its PMall and One Kings Lane stores.

It gross profit measurables were better, up nearly 2% to $1.3 million for the prior three months.  But gross profit margins dropped by over a half percent to 38%.  Much of the drop was due to higher promotional shipping costs as the firm attempts to better compete with online retailers like Amazon. There was also an uptick in coupon redemptions.  Thus, operating profit margins fell by over 2% for Q4.

The retail operator remains profitable and ended the year with $488 million in cash while long-term debt came in at $1.4 billion in total. The firm utilized nearly $400 million towards capital expenditures in 2016.  The firm anticipates that capital expenditures for next year to be the same.   The firm did utilize cash buying back 4 million shares of their own company stocks for $170 million.  This is only a fraction of its buyback plan authorization of $2.5 billion.

The firm does continue to grow, albeit more slowly than the past decade. Bed Bath & Beyond opened nine new stores in the last three months of the year while closing 4 unprofitable stores. Overall for the year, the net gain for new stores was 16.  The new stores were primarily in the BEYOND model stores.

After initiating its first dividend last year, its payout ratio is very low.  Its overall yield is thus below that of the market. The firm does trade at a very low price/sales ratio and only 8 times earnings. The stock maintains a beta below that of the market as well. However, the retail space is under substantial competition and sales growth for the firm for the next few years will most likely be small.  We think that other retailers with higher yields (i.e. Target) or Mall based REITs like Simon Properties are better ways for dividend investors to invest in the industry.

2016
Earnings per Share 4.5
Annual Dividend 0.38
Payout Ratio 8.44%
Earnings per Share 2017 (projected) 4.8
Dividend 0.6
Payout Ratio 12.50%

 

Based on the firm’s newly established dividend, low payout ratio, scant sales growth, and below average yield, Bed Bath & Beyond Inc. does not qualify as one of our Top 100 Dividend Stocks

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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