A growing dividend is a great indicator of a mature business and of the competency of its management team. This is because, over longer periods of time, dividend growth can only be sustained by business growth. Having just upped its quarterly dividend per share by 8.1% to $0.335, Ross Stores (ROST 1.17%) arguably fits this profile to a T.
But is Ross Stores' stock a buy for dividend growth investors? Let's delve into the off-price retailer's fundamentals and valuation to get an answer.
Ross manages strong sales and earnings growth
Ross Stores is the biggest off-price apparel and home fashion retailer in the United States. The company's "no frills" approach of no window displays or mannequins differentiates it from department stores. The California-based business also has prudent buying agents who scour the world for the best brands, leveraging its massive purchasing power in negotiations with suppliers. These factors explain how Ross Stores can offer customers 20% to 60% off department and specialty store regular prices for its merchandise.
Image source: Getty Images.
Ross Stores' sales edged 3.9% higher over the year-ago period to $5.2 billion during the fiscal fourth quarter that ended Jan. 28. Even in the current economic environment that is challenging to lower- and middle-class income brackets, consumers are frequenting Ross' stores. This is how the company's comparable store sales grew by 1% year over year for the quarter. Paired with a 4.8% rise in the company's total store count to over 2,000 Ross Dress for Less and dd's Discounts stores, this propelled sales higher in the quarter.
Ross Stores' diluted earnings per share (EPS) soared 26% over the year-ago period to $1.31 during the fiscal fourth quarter. Due to tight cost controls, the company's total costs only rose 1.9% year over year for the quarter. This allowed Ross Stores' net margin to expand by almost 130 basis points over the year-ago period to 8.6%. The company also reduced its outstanding share count by 2.6% via share repurchases. Thanks to these variables, the company's diluted EPS growth greatly outpaced its sales growth in the quarter.
With a long-term target to open 3,600 stores in the U.S., Ross has a lengthy growth runway. This is why analysts believe that the company's diluted EPS will grow by 8.1% annually for the next five years.
The dividend can keep growing
Ross Stores' 1.3% dividend yield is below the S&P 500 index's 1.7% yield. But with the quarterly dividend per share having nearly quadrupled over the last 10 years, the stock is more of a dividend growth bet than an immediate income play.
ROST Dividend data by YCharts
And robust dividend growth appears poised to continue in the years ahead. That's because Ross Stores' dividend payout ratio is expected to come in under 27% for the current fiscal year. This leaves the company with more than enough capital for new store openings, debt repayment, and share buybacks.
Ross is a reasonable value
Ross Stores' share prices have surged 19% over the last year while the broader market struggled. Surprisingly, the stock still seems to be sensibly valued.
Ross Stores' forward price-to-earnings (P/E) ratio of 18.6 is marginally above the apparel retail industry average forward P/E ratio of 17. For a leading business such as Ross, this is arguably a reasonable premium to pay. That's why I believe dividend growth investors should consider buying Ross for their portfolios.
