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Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I'll show you why handbag and accessories maker Coach (NYSE: COH ) could make for a smart play over the long run.
An ongoing retail fail
The retail environment over the past five years has been about as consistent as I am when I'm playing cricket while intoxicated. There have been ample reasons for consumers to go out and make purchases, including exceptionally low lending rates, which have greatly reduced the APR percentage consumers pay on their credit cards, and deep discounts from retailers that don't want to sit on unwanted inventory. Conversely, consumer spending habits are still tepid at best because of the expectation for higher taxes and a still slow-growth environment rife with high unemployment rates.
This was the plight of handbag maker Coach over the past two quarters as it struggled to get U.S. consumers to buy its products, as consumers deferred to cheaper or promotional items. In its January quarter, Coach delivered just 1% North American sales growth while international sales gained by 12%. By comparison, Michael Kors (NYSE: KORS ) delivered 41.4% global same-store sales growth in its February quarter as it rapidly expands its square footage and relies heavily on its affordable image.
However, I had cautioned investors shortly after Coach's big miss that its weakness would likely be only temporary as it has numerous factors working in its favor. Based on its quarterly results earlier this week, which sent shares higher by double-digits, I'd say that it's well on its way to remedying its short-term problems. Sales in the third quarter improved 7%, thanks largely to a 7% boost in North American sales, and a 40% catapult in sales from China.
How Coach is head and shoulders above its peers
One prime aspect that helps set Coach apart from its competitors is its unwillingness to tarnish its brand with discounting.
There are an immeasurable number of companies that rely on discounting to drive customer traffic. One notable example we've covered frequently is teen-clothing retailer Aeropostale (NASDAQOTH: AROPQ ) . When economic times are booming, its inventory moves quickly enough that its deep discounts go unnoticed. The past few years, though, have been difficult, with the company unable to move unwanted merchandise even at steep discounts.
Then there are the companies that live and die by their brand image. Coach and high-end jewelry retailer Tiffany (NYSE: TIF ) fall into this category. By refusing to discount, they maintain the high integrity and value of their product on a consistent basis and give the consumer ample reason to buy now as opposed to waiting later for a better price.
Another aspect where Coach is cashing in is in international markets. Like Michael Kors, which has somehow managed to find success in its European expansion, Coach is finding incredible success overseas in China. What's even more interesting about its overseas success is that it's come as it focuses more intently on its male customers, which, overseas at least, are providing some of the biggest boost to its bottom line.
We also can't overlook Coach's improvements in its direct-to-consumer business in North America, which showed 8% growth from the previous quarter. Consumers are expecting today's retailers to provide an enjoyable and easy-to-navigate digital experience, and it appears that Coach is hitting on all of those notes.
It's payback time!
What really stands out to me, though, aside from Coach's comparative advantages relative to its peers, is its nicely sized share repurchase program and shareholder-friendly dividend, which has grown by leaps and bounds since it was initiated in 2009.
In October, Coach announced a share repurchase program worth $1.5 billion that is effective through the end of June 2015. Based on Friday's closing price, that'd translate to approximately 9% of its outstanding share count. Although buybacks don't put money directly into shareholders' pockets, it makes existing shares worth more, as profits are divided into fewer outstanding shares.
Even more impressive is Coach's phenomenal dividend growth. Since 2009, and including the 12.5% boost to its annual dividend that it announced this week, Coach's quarterly payout has increased from just $0.075 in 2009 to $0.3375 in its upcoming quarter -- just your run-of-the-mill 350% four-year increase!
What's more, even with a $1.35 annual payout, Coach is paying out only 36% of its projected 2013 EPS, leaving plenty of room for business and dividend expansion.
Coach is an absolute marvel in the retail world. This isn't to say that it isn't going to have an occasional hiccup as consumer spending habits and tastes shift, but there are few companies suited to adjust to these shifts with such swiftness and success as Coach. In addition to delivering the right product for a clearly defined price, Coach sets itself apart from its peers with a rapidly growing dividend and top-tier share repurchase program aimed at improving shareholder value. With a 2.4% yield, a well-recognized brand name, and a projected five-year growth rate of nearly 13%, I think Coach is a dividend you can trust for the long run.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.