It's been a painful few years for investors in Designer Brands (NYSE:DBI). Late 2013, this stock traded over $40 per share. There have been ups and downs, but the stock is ultimately down about 60% over the last six years. While those overall results stink, one bright spot is the company's stable dividend. Paid out now for 27 consecutive quarters, it currently yields 6%.
Investors often wonder how "safe" a dividend is. How likely is it that a company can continue paying its dividend and even increase it over time? Let's examine why I think Designer Brands dividend is currently safe -- but why that safety comes with one caveat.
To fully appreciate dividends, perhaps we should start with the dividend "gold standard:" the S&P 500 Dividend Aristocrats. The companies in this exclusive club have not only paid out dividends every year for 25 years, they've also increased those payouts annually. This reflects two of the most desired features in a dividend: consistency and growth.
The chart below shows Designer Brands dividend history. While it's not headed toward Aristocrat club membership, it's increased three times in the past six years, which demonstrates solid consistency. Another reason to like the dividend from Designer Brands: it yields a 6% return at today's prices. For perspective, competitor Foot Locker's dividend yield is just north of 3%.
Yet one area of concern might be Designer Brands' dividend payout ratio. A payout ratio is calculated by dividing a company's dividend by its bottom line. At the risk of oversimplifying things, let's just say you want to see this ratio well below 100%. If a company has a payout ratio over 100%, it means it's paying more in a dividend than it actually earns. That isn't sustainable long-term. A nervous glance at Designer Brands shows a payout ratio of 145%, according to Yahoo! Finance.
So on the surface, Designer Brands dividend would appear "unsafe." But we can dig a little deeper and ask if something is temporarily impacting earnings. In this particular situation, the answer is yes. The company recently acquired Shoe Company and the Camuto Group. These acquisitions impacted earnings in recent quarters as the company restructures. In the past year, some quarters even produced negative earnings. But it earned $0.37 per share in the most recent quarter, and, removing a few lingering acquisition expenses, it would have earned $0.48 per share. Given the company pays out a $0.25 dividend, that payout ratio is a much more manageable 68%. And excluding the acquisition costs, it would have been a payout of 52%. Much safer.
Looking at a payout ratio is useful, but like all metrics it shouldn't be taken in isolation. A company with a "safe" payout ratio today might have terrible business prospects for tomorrow. In other words, you can't divorce dividend health from overall business health.
When it comes to Designer Brands, it has historically just sold shoes in physical retail locations. However, these days shoe companies like Nike and Under Armour are cutting out middlemen like Designer Brands and going direct to the customer via online sales. That majorly disrupts the game. But Designer Brands refuses to bow out quietly. Rather, it has chosen to aggressively adapt its business model by acquiring and producing its own brands of shoes.
Going forward, the company won't completely throw out selling shoes as a middleman, as evidenced by its acquisition of Shoe Company. Since Shoe Company operates exclusively in Canada, this acquisition gives Designer Brands a stronger international presence. But being a company with its own brands is its strategy to stay relevant, as demonstrated by its name change from DSW to Designer Brands. And shelling out $375 million for the Camuto Group shows this company is serious about its new strategy.
I think it's a great and necessary strategic move for Designer Brands, however ultimately it's too early to know if it's going to work. But we know management is very bullish. To close out 2018, CEO Roger Rawlins guided for $2.75 earnings per share for 2021. That quadruples the company's earnings today. In other words the company trades for only about six times guided 2021 earnings, and pays a 6% dividend while you wait.