It's not an understatement to say that major volatility has returned to the financial markets in 2022 for the first time since 2020. Economic and geopolitical worries explain why the S&P 500 index has dipped 19% year-to-date.
This market volatility may be unsettling to investors in the short term, but it is leading to great buying opportunities for the long run, and the specialty retailer Williams-Sonoma (WSM 0.15%) is one high-quality company that long-term investors might want to consider. But is the stock a buy for investors seeking growing dividend income?
Let's dig into Williams-Sonoma's fundamentals and valuation to find out.
Impressive growth continued in the first quarter
Williams-Sonoma reported record net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) for the first quarter ended May 1.
The company recorded $1.9 billion in net revenue during the quarter, up 8.1% over the year-ago period. This comfortably topped analysts' average net revenue forecast of $1.8 billion for the quarter. How did Williams-Sonoma exceed the consensus in the first quarter -- and for the ninth quarter out of the last 10?
It was thanks to 9.5% comparable brand revenue growth. Williams-Sonoma's Pottery Barn and West Elm brands both saw double-digit growth. This was partially offset by low single-digit revenue declines in Pottery Barn Kids and Teen and the eponymous Williams-Sonoma brand.
Williams-Sonoma had a high bar to clear compared to the year-ago period, when the American Rescue Plan was signed into law. That's because consumers had more discretionary income in the prior year from the economic stimulus. Yet the company still managed to grow its net revenue, demonstrating the power of Williams-Sonoma's brands.
The company posted $3.50 in adjusted diluted EPS in the first quarter, which was good enough for a 20.7% year-over-year growth rate. This was significantly higher than the average analyst-adjusted diluted EPS prediction of $2.90 for the quarter. And it represented the 10th quarter out of the past 10 quarters that Williams-Sonoma has surpassed the analyst-adjusted diluted EPS consensus.
This was achieved thanks to two factors. First, Williams-Sonoma's non-GAAP net margin expanded by 40 basis points over the year-ago period to 13.4% during the first quarter. Second, the company's diluted outstanding share count declined 7.4% year-over-year to 72.7 million in the quarter.
Even with a potential recession on the horizon, analysts are still expecting 4.7% annual earnings growth over the next five years for Williams-Sonoma.
Image source: Getty Images.
The dividend is very secure
Williams-Sonoma also yields a market-beating 2.5%, which is meaningfully higher than the S&P 500 index's 1.6% yield. And income investors can sleep well at night knowing that the stock's dividend is safe.
This is because Williams-Sonoma's dividend payout ratio is projected to be 19% in 2022. This gives it a huge margin of safety to grow its dividend through most recessions, while also reinvesting in the business. The stock's low payout ratio is why I believe Williams-Sonoma will be able to deliver high-single-digit annual dividend growth in the years ahead.
A wonderful business at a deep discount
Williams-Sonoma is a fundamentally strong company, and the stock's valuation looks to be a solid deal for investors. It forward price-to-earnings (P/E) ratio of 7.7 is much lower than the apparel, accessories, and luxury goods industry average multiple of 10.2. That's why investors would be wise to consider buying the stock now.
