3 Retailers With Outstanding Dividend Growth Prospects

Costco, CVS, and Macy's are three high-quality retailers with outstanding dividend growth prospects.

Jan 18, 2014 at 4:00PM

The retail environment has been notoriously challenging and competitive lately. For this reason, investors need to be particularly selective when investing in the sector. Dividend growth is a clear and transparent sign of fundamental strength, and companies like Costco (NASDAQ:COST), CVS (NYSE:CVS), and Macy's (NYSE:M) have what it takes to deliver growing dividends for years to come.

Costco is smart and effective
Costco has a smart and effective business model: The company makes most of its profits from membership fees, as opposed to margins on sales, and this allows it to charge competitively low prices for its products. In addition, Costco prioritizes efficiency and low prices over product variety when it comes to sourcing and inventory decisions.

Customers seem to be quite happy with the company. Renewal rates have been consistently above 85% over the last several years, and the last quarter was as strong as usual. The global renewal rate remained 87%, and key markets like the U.S. and Canada performed particularly well, with renewal rates of more than 90%.

The company continues delivering healthy sales growth in spite of the challenging retail environment, and comparable sales excluding the impact of foreign exchange fluctuations and gasoline prices increased by 5% in the U.S. and 7% in international markets during December.

The dividend yield is quite modest at 1.1%, but payments have increased materially from $0.10 in 2004 to $0.31 currently. The company has a resilient business model and a conservatively low payout ratio in the area of 25% of earnings, so Costco is well positioned to continue raising dividends in the coming years.

CVS for healthy dividend growth
CVS is both one of the leading U.S. pharmacy retailers and a major pharmacy benefit manager. The company benefits from its vertically integrated operations and scale advantages, which generate cost efficiencies and negotiating power with suppliers.

Factors like an aging population, technological advancements in the health care industry and the broadening of medical insurance coverage represent considerable tailwinds for the company over the medium and long term.

CVS is firing on all cylinders from a financial point of view; the company expects to deliver adjusted earnings-per-share growth of between 10.25% and 13.75% during 2014, and CFO Dave Denton is quite optimistic about the future of the business:

CVS Caremark has a strong track record of meeting or exceeding our financial targets. The outlook for 2014 is bright, and we are focused on strategies that will lead to solid, long-term enterprise growth. We continue to generate a substantial amount of free cash flow and we remain committed to disciplined capital allocation practices that drive value for our shareholders.

The company announced a whopping dividend increase of 38% in December, and it still has a lot of room for dividend growth considering its fundamental strength and safe payout ratio near 25%. The dividend yield is 1.6%.

Macy's is outperforming
While most department stores are reporting dismal sales figures for the key holiday season, Macy's is performing materially better than its peers thanks to its omnichannel strategy, its focus on private-level offerings, and its price optimization initiatives.

The company has delivered growing earnings per share over the last 15 consecutive quarters, and it recently announced a healthy increase of 4.3% in comparable sales, including departments licensed to third parties during the holiday shopping season. Management is expecting comparable sales growth between 2.3% and 2.5% in the fourth quarter and comparable sales growth in the range of 2.5% to 3% for 2014. 

Macy's is implementing a series of initiatives aimed at reducing $100 million in annual expenses starting in 2014, so the company is not resting on its laurels and remains focused on maximizing efficiency and generating profitability for shareholders.

The company had to cut its dividend and restructure operations because of the recession in 2009, but it has emerged stronger than ever and has been delivering outstanding dividend growth since then. What was a $0.05-per-share dividend in 2010 has now grown into $0.25 per share, and the comfortably low payout ratio of 26% means plenty of potential for further dividend growth. Macy's pays a dividend yield of 1.8%. 

Bottom line
Growing dividends don't only provide income for investors, they also reflect a sound and healthy business. Even in a challenging economic scenario for retailers, Costco, CVS, and Macy's offer outstanding dividend growth prospects, and that says a lot about the fundamental quality of these companies.

Looking for more great dividend picks?
If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

Fool contributor Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers