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Dividends Talk: What Target, Best Buy, and Big Lots Are Saying

Dividends are not only a source of income for investors, they also convey valuable information about a company, its prospects, and financial strength. Target (NYSE: TGT  ) , Best Buy (NYSE: BBY  ) , and Big Lots (NYSE: BIG  ) made important dividend announcements in June, so let's take a look at these companies and what recent dividend news could mean for investors.

On June 11 Target announced a big 20.9% increase in dividends, bringing the quarterly payment to $0.52 per share. On a forward basis, this means Target will be paying a dividend yield of 3.6% -- quite an attractive return for a company in the retail business.

Source: Target.

The data breach that affected Target in December of last year is still a reason for concern among investors in the company, and financial performance is still under pressure. Comparable sales in the U.S. declined by 0.3% during the quarter ended on May 3, while total sales in the country increased only 0.2%, to $16.7 billion from $16.6 billion last year.

But management sounded confident regarding prospects for a recovery in the medium term: "First quarter financial performance in both our U.S. and Canadian Segments was in line with expectations, reflecting the benefit of continued recovery from the data breach and early signs of improvement in our Canada operations."

Target is betting on a renewed management team and initiatives to reignite sales as a strategy to improve financial performance over the coming quarters, and the big dividend increase announced by the company could be interpreted as a sign of confidence. 

The new dividend represents a reasonable payout ratio of between 53% and 58% when compared to Target´s earnings guidance for fiscal 2014, in the range of $3.60 to $3.90 per share. Besides, Target has a healthy balance sheet, so the dividend payment is clearly sustainable.

Best Buy
Best Buy announced on June 10 a 12% hike in dividends, from $0.17 to $0.19 per share. The new dividend yield stands at 2.5%, and the dividend payout ratio is quite low, in the neighborhood of 33% of average earnings estimates for the fiscal year ending in January 2015.

Source: Best Buy.

Best Buy president and CEO Hubert Joly remarked in the press release regarding the dividend increase: "Our decision to increase the amount of cash we are returning to shareholders is indicative of our improved cash position and our confidence in the cash-generating power of our multi-channel business model."

However, investors need to keep in mind that competition from online retailers is a particularly challenging problem for electronics retailers, and Best Buy is facing considerable industry headwinds.

During the quarter ended on May 3, Best Buy's sales in the U.S. fell 2.1% to $7.78 billion on the back of a 1.3% drop in domestic comparable-store sales. The company reported a razor-thin profit margin of 2.2% of sales at the operating level, and aggressive price competition in the industry will most likely keep margins at depressed levels in the medium term.

While it's easy to see the similarities between Target and Best Buy, as both companies are communicating optimism when it comes to moving beyond their recent difficulties, Best Buy could be riskier than Target, because competition from online retailers is a particularly challenging problem for brick-and-mortar players in the electronics category.

Big Lots
Big Lots has risen by more than 47% year to date, as investors are applauding the company's improved financial performance over the last several quarters. In addition, management provided more encouraging news for shareholders on June 25, when Big Lots initiated a dividend program. 

Surce: Big Lots.

The company will be distributing $0.17 quarterly per share, which represents a dividend yield of 1.5%. Wall Street analysts are, on average, forecasting $2.49 in earnings per share from Big Lots during the current fiscal year, so the payout ratio is comfortably low at 27.3%.

Big Lots was quite clear regarding the rationale for the dividend increase in the press release: "Today's announcement demonstrates the confidence we have as a Board of Directors in our management team, our strategy, and our long-term opportunities to drive meaningful profit growth and cash flow to return to our shareholders."   

Big Lots reported a sales increase of 1.1% during the quarter ended on May 3, which was better than analysts' expectations during a particularly challenging period in which most competitors were affected by the unusually harsh weather. Forward guidance from Big Lots was also better than expected, so the recently announced dividend hike is confirming that Big Lots is moving in the right direction lately.

Foolish takeaway
Target, Best Buy, and Big Lots are three different retailers operating in their own product categories and with their particular weaknesses and strengths. However, the three companies are expressing confidence via dividend increases, and that's an important factor to consider when making investment decisions.

These dividend stocks can make you rich
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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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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8/28/2015 4:00 PM
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