In the case of more established companies that pay a dividend, dividend growth is an excellent barometer to measure the quality of a business. That's because, all else equal, rapid dividend growth means that profits are quickly growing as well to support the payout.
Hot off a 15.4% hike in its quarterly dividend per share to $0.90 earlier this month, the high-end home retailer known as Williams-Sonoma (WSM 1.84%) is a top-notch dividend growth stock. This raises the following question: Should dividend growth investors buy the stock at the recent $119 share price? Let's dig into the retailer's fundamentals and valuation to decide.
Demographics are key to the company's success
Williams-Sonoma is a design-focused home furnishings and kitchen retailer. The California-based business is best known for its eponymous brand named Williams-Sonoma, as well as West Elm, Pottery Barn, and Rejuvenation.
| FY2022 net revenue | Net revenue growth rate |
|---|---|
| $8.7 billion | 5.2% |
Williams-Sonoma's brands appeal to higher-earning customers, which is why the company did so well despite the inflationary environment throughout its most recent fiscal year ended Jan. 29. Affluent individuals and households have more disposable income than those in lower income brackets, so they are likely to spend more on non-discretionary purchases, regardless of macroeconomic circumstances.
This explains how net revenue was able to move upward, even after the blistering 21.6% top-line growth rate logged in the previous fiscal year.
| Cost of goods sold growth rate | Share count growth rate |
|---|---|
| 11.3% | (9.5%) |
Williams-Sonoma's non-GAAP (adjusted) diluted earnings per share (EPS) surged 11.4% year over year to $16.54 for the fiscal year. Because the company's cost of goods sold expense category grew at a faster rate in net sales, non-GAAP operating margin retreated slightly to 17.5% during the fiscal year. Along with the significant reduction in its share count, this is how adjusted diluted EPS grew at a much higher rate than net revenue in the prior fiscal year.
As big of a business as Williams-Sonoma is, the company's total market opportunity is more than $800 billion. Continued investments in its e-commerce platform should help the company to grow its share of the market over time. This is how analysts believe that Williams-Sonoma's adjusted diluted EPS will compound by 8.9% annually over the next five years.
Image source: Getty Images.
The dividend could keep growing like a weed
Williams-Sonoma's 3.1% dividend yield clocks in at nearly double the S&P 500 index's 1.7% yield. Surprisingly for a yield that high, four of the last five dividend boosts have been at least 10%. And just as strong dividend growth should be the norm over the medium term as well.
This is because Williams-Sonoma's dividend payout ratio will be around 27% for the current fiscal year, which just started a couple of months ago. That leaves the retailer with the capital necessary to grow the business, keep lifting the payout, and repurchase shares.
A great business on sale
Shares of Williams-Sonoma haven't been spared amid the stock market downturn in the past year, down 26% over that time.
This sell-off has pushed Williams-Sonoma's forward price-to-earnings (P/E) ratio down to just 8.6. For context, that is well below the apparel, accessories, and luxury goods forward P/E ratio of 11. This modest valuation arguably makes the stock a no-brainer buy for investors looking to build their passive income over the long run.
