Macy's, Inc. vs. L Brands Inc: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two fashion retailers will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Founded in 1858, Macy's  (NYSE: M  ) is a leading North American retailer, operating department stores and e-commerce sites under the Macy's and Bloomingdale's websites. Headquartered in Cincinnati, the company has more than 172,500 employees in roughly 840 stores across 45 states, the District of Columbia, Guam, and Puerto Rico. Macy's also has eSpot ZoomShops kiosks at more than 300 store locations to sell consumer electronics items. Macy's is the largest department store operator in the United States, boasting a market share of roughly 6.4% in the sector, according to figures compiled by retail analytics firm Verdict.

Founded in 1963, L Brands Inc (NYSE: LB  ) , formerly known as Limited Brands, has evolved from an apparel-focused specialty retailer to a female-centric niche retailer in the United States. The company primarily operates stores under its flagship brands, Victoria's Secret and Bath & Body Works, but also has storefronts under the Pink, Henri Bendel, and La Senza banners. Headquartered in Columbus, Ohio, the company operates more than 2,600 specialty stores -- including company-owned and franchised outlets -- with over 100,000 employees in the United States, Canada, and other international locations. L Brands has also been a major developer or acquirer of a number of notable fashion brands over the years, including The Limited, for which it was named and which it divested in 2010, as well as Lane Bryant, Abercrombie & Fitch (acquired in 1988 and spun off in 1996), New York & Company, and Express.

Metric

Macy's

L Brands

Market cap

$21.7 billion

$17.2 billion

P/E ratio

15.3

19.2

Trailing 12-month profit margin

5.3%

8.4%

TTM free cash flow margin*

5.3%

5.4%

5-year total return 

398.8%

584.4%

Source: Morningstar and YCharts. *Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: Endurance (dividend-paying streak)
According to Dividata, Macy's has paid uninterrupted dividends for 11 years in a row since it began distributions in 2003. However, L Brands has made quarterly shareholder distributions since 1985, and that three-decade dividend streak gives the specialty retailer an easy edge over the department store superstar in the first round.

Winner: L Brands, 1-0.

Round two: Stability (dividend-raising streak)
Macy's has been rapidly raising its dividend since 2011, but this was made possible in part by a drastic reduction in payouts during the financial crisis. L Brands has also been raising its quarterly payouts since 2011, but it also boasts an annual special dividend payout that has not consistently grown in the same time frame. Since neither company has a clear edge, this contest is a...

TIE.

Round three: Power (dividend yield)
Some dividends are enticing, while others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

M Dividend Yield (TTM) Chart

M Dividend Yield (TTM) data by YCharts.

Winner: L Brands, 2-0.

Round four: Strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years. A single-chart comparison isn't accurate due to L Brands' special dividend payouts, but we can get a clearer picture with separate charts:

M Dividend Chart

M Dividend data by YCharts.

LB Dividend Chart

LB Dividend data by YCharts.

Winner: Macy's, 1-2.

Round five: Flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

M Cash Dividend Payout Ratio (TTM) Chart

M Cash Dividend Payout Ratio (TTM) data by YCharts.

Winner: Macy's, 2-2.

Bonus round: Opportunities and threats
Macy's and L Brands have claimed a rare tie today in the best-of-five battle, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Macy's opportunities

L Brands opportunities

Macy's threats

L Brands threats

One dividend to rule them all
In this writer's humble opinion, it seems that Macy's and L Brands are both solid selections for long-term outperformance, thanks to their ubiquitous presence in thousands of brick-and-mortar stores across the U.S. and Canada. While Macy's seems poised to benefit from a strong omnichannel presence, L Brands has been aggressively expanding internationally to capitalize on the rising popularity of Victoria's Secret and Bath & Body Works brands worldwide. Both companies face ongoing competitive threats, but that's always the case in the hotly competitive world of fashion retail, and both Macy's and L Brands have proven more than capable of fending off these threats in the past. You might feel that one company is more deserving than the other of winning this contest, and if so, you're encouraged to share your viewpoint in the comments box below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


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