What are two almost-surefire signs that a company is doing well and expects that to continue in the future?
The answer is when said company announces an increase in its dividend paid to shareholders as well as a large share repurchase program. This is because it typically demonstrates that the company is producing too much cash flow to entirely reinvest back into its business.
On March 1, off-price retailer Ross Stores (ROST 0.07%) raised its quarterly dividend per share by 8.8% to $0.31 and authorized a $1.9 billion share repurchase program. Let's dive into three reasons why the stock now looks like a buy for dividend investors.
1. Strong operating results in 2021
Ross Stores reported impressive results for its fiscal 2021 year, which ended Jan. 29, 2022.
The company recorded $18.9 billion in total sales during the year, up 50.9% growth rate over the year-ago period. Even compared to the more appropriate pre-pandemic year of 2019, Ross Stores' total sales surged 17.9% higher.
The company's robust total sales growth was driven by two factors. First, comparable sales were up 13% over 2019. The lifting of various COVID-19 restrictions in the early part of the fiscal year led customers to flock to the company's stores in droves. And the stimulus package that was signed into law last fiscal year also meant that those customers had more money available to spend. Second, Ross Stores' store count increased 6.5% over 2019 to 1,923 at the end of the fiscal year.
On the earnings front, the stock posted $4.87 in diluted earnings per share (EPS). This was a more than twentyfold increase over 2020 and 5.9% greater than 2019. Aside from the higher sales base, Ross Stores' diluted EPS growth over 2019 was the result of two moving parts. For one, the company's net margin decreased 120 basis points from 2019 to 9.1%. That decline in profitability was partially offset by a 2.1% reduction in the weighted average, diluted outstanding share count to 353.7 million in 2021.
Looking at the current fiscal year, the company anticipates that midpoint sales will be up 1.5% and diluted EPS will edge higher by 0.9%. The reasons for Ross Stores' muted growth expectations for this fiscal year are the high comparisons stemming from last year's record government stimulus and the lifting of COVID-19 restrictions. Beyond this fiscal year, however, Ross Stores is forecasting a return to double-digit earnings growth.
2. The dividend is well-covered
Ross Stores' solid long-term growth potential isn't the only thing the stock has going for it. The stock's dividend payout ratio for this year is set to be 25.2%. This suggests that Ross Stores was easily able to afford its dividend raise. Even with the new share buyback program, the company looks like it is retaining enough capital to meet its long-term growth target total of 3,600 stores.
This is why I believe high-single-digit to low-double-digit annual dividend growth will persist in the medium term. Ross Stores' 1.2% dividend yield is only moderately lower than the S&P 500's 1.5% yield. But the promising growth potential of Ross Stores' dividend makes up for the lower starting yield in my opinion.
3. A superior stock at a fair valuation
Ross Stores is a fundamentally healthy business. But the stock's valuation doesn't fully reflect this reality. Currently, it trades at a forward price-to-earnings ratio of 18.5, which is only moderately higher than the apparel retail industry average of 16.2. Ross Stores' annual earnings growth outlook over the next five years of 35.8% is nearly double the industry average of 19.6%. This is what makes the stock a buying opportunity for smart investors.