Please ensure Javascript is enabled for purposes of website accessibility

Is Macy’s Dividend Sustainable?

By Luis Sanchez CFA - Updated Apr 15, 2019 at 11:36AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Macy's has an attractive dividend yield, but does the company have the financial strength to maintain its payout?

Macy's (M 1.82%) is a controversial stock. Some view the company as troubled because it operates mall-based stores that have seen foot traffic decline in recent years. The mall focus has meant Macy's financial performance has suffered as shopping has increasingly moved online. Macy's stock price has declined from over $70 per share a few years ago to below $30 today.

At the same time, the company has increased its per-share dividend payments, making it more attractive to investors looking for a paycheck from their stocks. The combination of a lower stock price and increased dividend payment has resulted in the stock's dividend yield -- calculated by dividing the annual dividend payment by the stock's current price -- rising to over 6%. A 6% dividend yield is no small potatoes for income-focused investors, but is the dividend sustainable?

M Chart

M data by YCharts

Macy's financial results are stabilizing

Macy's has built much of its store base at suburban malls, and the company has seen its revenue decline as mall traffic has fallen. In response, the company has closed many of its underperforming mall-based stores. Macy's turnaround plan also involves making deep cuts to corporate staff and selling real estate to raise cash.

The turnaround efforts appear to be paying off. This past fiscal year, which ended in early February, the company saw comparable-store sales grow for the first time in five years. Comps, which measure sales at stores open for at least one year and exclude sales from closed stores, are the best apples-to-apples measurement of retail store performance. Therefore, it is encouraging that Macy's is starting to show progress on this front.

Check out the latest earnings call transcript for Macy's.

Sector Comps Growth FY 2015 Comps Growth FY 2016 Comps Growth FY 2017 Comps Growth FY 2018 Comps Growth FY 2019

Owned

0.7%

(3%)

(3.5%)

(2.2%)

1.7%

Owned plus licensed

1.4%

(2.5%)

(2.9%)

(1.9%)

2%

Data source: Macy's financial reports. Macy's "licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales."

Operating income has been nearly halved over the past five years because of a steep drop in margins and fewer stores. However, it is encouraging that operating income saw a much smaller decline in the most recent fiscal year. Operating income is a measure of earnings that excludes non-recurring expenses and the impact from interest and taxes. Operating income is a good indicator of the health of a business and its ability to service debt and pay dividends.

M Operating Income (Annual) Chart

M Operating Income (Annual) data by YCharts

Macy's has no doubt faced several difficult years, but the company's improving financial results show that there may be a light at the end of the tunnel. The company has been working hard to restructure and turn around its business and evidence is building that its strategy is working.

People shopping inside of a mall.

Image source: Getty Images.

Macy's cash flow covers its dividend payments

For investors who own Macy's stock for the dividend, the most pressing question is whether the current dividend payments are sustainable. The most effective way to determine how sustainable dividend payments are is to judge if a company will have enough cash flow to continue making the payments.

Free cash flow is a measure of the cash a company collects after all expenses, including taxes, interest payments, and capital investments, have been accounted for.   

Check out some free cash flow and dividend numbers.

Metrics FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Free cash flow

$1,939 million

$1,207 million

$1,205 million

$1,457 million

$1,078 million

Dividends paid

$421 million

$456 million

$459 million

$461 million

$463 million

Data source: Macy's financial reports.

As you can see in the table above, Macy's generates enough cash flow to cover its dividend payments by a wide margin. Free cash flow has declined in recent years, but the company generates more than twice the amount of cash flow needed to make its dividend payments. This trend should continue as financial performance has started to stabilize. This is strong evidence suggesting the dividend is safe.

Macy's has improved its balance sheet

When judging if a dividend is safe, investors should also look at the company's debt load. There is more good news for Macy's investors on this front as the company has gone from over $7 billion in debt in 2015 to under $4 billion today.

If the company had not massively paid down its debt load, there is a good chance that Macy's could have hit serious financial trouble as it would have had a high debt load along with the spectacular decline in profits. Management deserves immense credit for improving the company's financial position while keeping its dividend intact.

Macy's dividend looks good

Macy's shareholders have been through a roller coaster of volatility over the past several years. The company has worked hard to address the operational challenges in its business and improve the health of its balance sheet. Earnings and cash flow have declined, but there are indications that the situation has stabilized and may even begin to improve.

One silver lining for investors who have stuck with the company has been the dividend payments. The company has increased its dividend despite the halving of its stock price. The stock now boasts a dividend yield in excess of 6% and based on an analysis of the company's cash flow and balance sheet, the dividend appears quite safe.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$21.30 (1.82%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
338%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.