Should Best Buy Be Hiking Its Dividend?

Best Buy's (NYSE: BBY  ) yield has been inching higher all year. A falling share price will do that, tragically enough.

However, the consumer electronics retailer is now helping prop its yield higher by actually increasing its quarterly payouts. Best Buy is boosting its dividend by 6% to $0.17 a share every three months.

Announcing the decision at this morning's annual shareholder meeting was a way for the company to reward its patient investors. The poor believers have put up with sluggish financials, a saucy CEO scandal, and a cascading share price. Giving them a little more pocket change as they see things through seems noble enough on the surface.

The new rate results in a healthy yield of 3.3% based on yesterday's close.

Shouldn't Best Buy be watching its pennies, though? This is a company that just two months ago decided to close 50 stores and lay off another 400 corporate employees as it fleshes out a plan to save $800 million in costs.

On the one hand, Best Buy's trying to save money. Then it goes and jacks up its dividend, and that's on top of the retailer's plan to spend $750 million to $1 billion this fiscal year in buying back stock. Yes, share buybacks are typically applause-worthy, but this is a company that has been buying back shares at higher prices recently.

Doesn't this send the wrong message to its employees? Morale-sucking closures and layoffs are saving money, but out the savings go for repurchases and fatter dividends. This wouldn't matter if Best Buy didn't really need the money, but it does.

Best Buy isn't as leveraged as many of its retailing peers, but it still has slightly more long-term debt than it does cash.

If any retailer needs to have money on hand, it has to be Best Buy. The company's in the process of rolling out smaller Best Buy Mobile stores to offset the closure of dozens of its big-box superstores. It's aping the RadioShack (NYSE: RSH  ) model, and that's a small-box wireless specialist that just surprised the market with an unexpected loss in its latest quarter.

Best Buy is also losing gobs of market share to Amazon.com (Nasdaq: AMZN  ) , and that's going to require lower prices. Consumers aren't falling for the high-margin warranty extensions and obsolescence insurance that the chain is peddling, so it's a matter of choosing to grow sales at lower margins or stay on the downward spiral of declining sales.

If there's any company that should be saving its money, it's Best Buy. What's the point of a 3.3% yield on a stock that has shed a third of its value over the past year? Reward shareholders by investing in a model that will work. Then again, this isn't the first time that money is flowing in the wrong direction at Best Buy.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS seven months ago. The call is beating the market so far -- because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

The Motley Fool owns shares of Amazon.com, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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