My objective as an investor is to purchase stocks with a reputation of rewarding their shareholders with dividend increases and prudent share repurchases, all backed by steady operating fundamentals.
One business that fits this description is the omnichannel (a multipronged approach to sales including mobile, desktop, and brick-and-mortar) specialty retailer Williams-Sonoma (WSM -2.60%).
Let's dig into how Williams-Sonoma's record second-quarter operating results and impeccable balance sheet made its substantial dividend raise and new share repurchase program possible, and whether the stock is worthy of attention from dividend investors at the current valuation.
Williams-Sonoma showers shareholders with capital after a solid report
Williams-Sonoma reported record second-quarter operating results this year, which is encouraging considering that the company faced a high bar compared to the year-ago period (when much of the country was still under COVID mitigation guidelines).
Williams-Sonoma's net revenue surged 30.7% year over year from $1.49 billion in Q2 2020 to $1.95 billion in Q2 2021, the latter of which beat average analyst forecasts of $1.81 billion by nearly 8%.
Even though Williams-Sonoma faced increased raw materials and freight costs in the second quarter, the company was able to expand its operating margins 360 basis points from 13.1% in the year-ago period to 16.7% in the second quarter of this year.
CFO Julie Whalen noted in her opening remarks during the Q2 2021 earnings call that this is because of the company's higher sales and a continued shift to its higher-margin e-commerce sales mix (approximately 65% of year-to-date sales).
Williams-Sonoma's higher revenue and increased operating efficiency allowed the company to grow its non-GAAP diluted earnings per share a staggering 80% year over year from $1.80 in Q2 2020 to $3.24 in Q2 2021. This trounced average analyst expectations of $2.60 for the second quarter by almost 25%.
With President and CEO Laura Alber reiterating key tailwinds such as a booming housing market and increasing acceptance of remote hybrid workers, Williams-Sonoma doesn't expect its incredible fundamentals to weaken anytime soon.
This is what led management to move its $10 billion revenue target up a year from 2025 to 2024. Along with anticipated non-GAAP operating margins of 16% to 17%, this represents significant upside over the previous year's $6.8 billion in revenue and 14.2% non-GAAP operating margin.
Shareholder-friendly capital management
Given Williams-Sonoma's recent results and its medium-term outlook, it shouldn't come as much of a surprise that the company announced a huge spike in capital that will be returned to shareholders directly (i.e., dividends) or indirectly (i.e., share repurchases).
The company announced a 20.3% increase in its quarterly dividend from $0.59 per share to $0.71 per share, which is the second dividend increase this year. This more than makes up for Williams-Sonoma's conservative decision to hold its quarterly dividend at $0.48 per share throughout most of 2020 before increasing the dividend 10.4% in December.
Williams-Sonoma's plan to drive shareholder returns was boosted even further when the company announced that it was replacing its prior remaining shareholder repurchase authorization of $560 million with a new $1.25 billion share repurchase program.
For context, Williams-Sonoma's share repurchase authorizations soared from 4% of the stock's $13.6 billion market capitalization to 9% with its new program. This is especially welcome news since I believe the company's shares are attractively priced, which makes the share repurchases a good use of excess capital.
A flawless balance sheet
In addition to its impressive operating results, Williams-Sonoma is one of the few publicly traded businesses to boast a balance sheet free of long-term debt as of Q2 2021.
If the company's absence of long-term debt on its balance sheet weren't enough, the company also maintained a huge cash position.
Williams-Sonoma's $655 million in cash works out to nearly 5% of its market cap, which should allow the company free reign with regard to executing share repurchases and delivering healthy dividend increases in the years ahead.
A high-quality, reasonably valued business
Williams-Sonoma's current price-to-free cash flow of 10.5 is well below its 13-year median price-to-FCF ratio of 15.2.
The company's tremendous second-quarter earnings beat directly contradicts the narrative that the company can't continue to deliver meaningful growth as COVID restrictions ease, and life reverts more to the pre-COVID "normal."
Williams-Sonoma's fundamentals and valuation both suggest that the stock could be worth consideration from dividend growth investors. The company's well-covered 1.6% yield (versus the S&P 500's 1.3%) offers the prospect of high-single-digit to low-double-digit annual dividend growth for the foreseeable future.