Market volatility is a double-edged sword. On one hand, the stock market downturns that it causes can lead investors to lose sleep at night and make rash decisions.
But on the other hand, sudden and sharp declines can be used to pick up shares of quality stocks on the cheap. This is how investors can harness bear markets to their advantage and build significant wealth over the long term.
With the S&P 500 index down 18% so far in 2022, plenty of stocks have been perhaps oversold this year. The digital-first home retailer Williams-Sonoma (WSM 0.15%) has plunged 34% year to date. Here's why this looks like a huge buying opportunity for dividend growth investors.
NYSE: WSM
Key Data Points
The resilient customer base is driving results
Since its founding in 1956 by Chuck Williams in Sonoma, California, Williams-Sonoma has become one of the most respected retailers in the world. The company's high-end kitchen and home furnishings brands include Pottery Barn, Mark and Graham, West Elm, and the eponymous Williams-Sonoma.
While the poor and middle class have been hit especially hard by inflation in 2022, Williams-Sonoma's customer base has been largely unscathed. The company's target customers are well-to-do, which means they have plenty of discretionary income to withstand increased gas and grocery prices while still buying Williams-Sonoma's products. That's exactly how Williams-Sonoma's net revenue increased 7.7% over the year-ago period to a record $2.2 billion for the third quarter.
The retailer recorded $3.72 in non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter, or 12% higher from a year ago. Due to tight control over its costs, Williams-Sonoma's net margin fell just 70 basis points over the year-ago period to 11.5% in the quarter. This slight dip in profitability was more than cancelled out by a staggering 11% reduction in the company's outstanding share count for the quarter. That's how Williams-Sonoma's adjusted diluted EPS growth came in at a faster rate than net revenue growth during the quarter.
Given the company's strong e-commerce channel and the under-penetration of its industry in the e-commerce space, analysts are expecting 4.9% annual adjusted diluted EPS growth for the next five years. And this is even including the anticipated double-digit drop in Williams-Sonoma's profits for fiscal year 2024.
Image source: Getty Images.
A market-topping dividend with robust growth
Williams-Sonoma sports a 2.8% dividend yield, which is well above the S&P 500 index's 1.7% yield. And this isn't just a boring stock with above-average starting income prospects; the company's payout to shareholders has nearly doubled from $1.54 in 2017 to $3.05 in 2022.
Considering that Williams-Sonoma's dividend payout ratio will be just 18.5% for this fiscal year, double-digit annual dividend growth could very well continue moving forward. This is because the dividend obligation is so low that Williams-Sonoma couldn't possibly invest anywhere near all of its excess profits in future growth. That could allow the dividend to grow at a much faster clip than earnings over the next few years.
The stock is a bargain
Williams-Sonoma will likely be hurt by a looming recession. But with more than a third of its market value erased in 2022, this is more than priced into the stock.
Williams-Sonoma's forward price-to-earnings ratio of 6.8 is materially below the average multiple for the luxury goods industry. That's why dividend growth investors would do well to consider buying this stock for their portfolios.
