Nordstrom Is a Decent Pick for Long-Term Income Investors

In the past 12 months, Nordstrom (NYSE: JWN  ) has disappointed its shareholders by only rising 4.9% in the stock market, underperforming the S&P 500 index's gain of nearly 19.5%. However, Nordstrom has been paying consistently increasing dividends since 2010. At the current trading price, Nordstrom offers its shareholders a decent dividend yield at 2.1%, with a conservative payout ratio at 31%. Is Nordstrom more attractive now than Macy's (NYSE: M  ) and Dillard's (NYSE: DDS  ) ?

Two reasons to stay bullish about Nordstrom
Nordstrom generated most of its revenue, around 66% of its total revenue, from Nordstrom full-line stores. However, this segment posted much slower growth than the retailer's other businesses, such as Nordstrom Rack and the direct segment.

In the past three years, while the direct business nearly doubled to approximately $1.3 billion in sales, Nordstrom Rack grew by nearly 45%. The company derived the majority of its sales from two biggest segments, women's apparel and shoes, representing 31% and 23%, respectively, of total 2012 sales.

Nordstrom wasn't a favorite stock of the market in 2013 due to declining earnings per share. In the third quarter, Nordstrom reported EPS of $0.69, lower than its comparable quarter earnings of $0.71, driven by a negative impact from the shift of its anniversary event to the second quarter.However, there are two important things that investors should focus on at Nordstrom.

First, Nordstrom could use leverage to boost returns. In the past 10 years, its return on equity has stayed in the range of 16%--43.5%. In the past 12 months, the return on equity was also very high, at around 38.7%. The high return on equity was driven mainly by financial leverage. Investors might feel scared that Nordstrom employed high financial leverage, at more than 4.3. However, because of its consistent cash flow generation, the leverage ratio is not high but reasonable. As of October, it had nearly $2 billion in stockholders' equity and more than $3.1 billion in both long- and short-term debt. The net debt came in at around $2.1 billion. With trailing-12 month earnings before interest, taxes, depreciation, and amortization of $1.7 billion, the leverage ratio is only 1.2.

At the current price, Nordstrom yields 2.1% for shareholders, the highest dividend yield among the three. Macy's ranks second with a 1.8% dividend yield and a payout ratio of 26%. Dillard's offers investors the lowest dividend yield at only 0.3% but the highest payout ratio, at 68%.

Highest ROE and dividend yield as compared to Macy's and Dillard's
Macy's generated a much lower return on equity with just a bit lower financial leverage. In the past 12 months, Macy's return on equity stayed at 25.5% with the asset/liabilities ratio at 4.1. However, Macy's net debt/EBITDA ratio is much higher than Nordstrom. With nearly $2.7 billion in LTM, or last 12 months, EBITDA, its leverage ratio is 2.2, indicating a weaker balance sheet position compared to Nordstrom.

Dillard's is the least profitable retailer among the three, with the lowest LTM return on equity at 18.6%. However, it also employs the most conservative capital structure with the assets/liabilities ratio of 2.4. With the LTM EBITDA of $850 million, Dillard's net debt/EBITDA ratio is also the lowest among the three, at only around 1.

My Foolish take
For the full year, Nordstrom raised its full-year earnings estimate to $3.65-$3.70 per share, along with same-store sales growth of 2.5%. Indeed, Nordstrom seems to be the best pick among the three retailers because of its high dividend yield, a quite reasonable leverage ratio, and the highest return on equity of the group.

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