A company's past may not always line up perfectly with its future. But that doesn't mean that looking into a company's past is worthless. It can offer insight into the validity of its business model.
Having both survived and thrived through countless recessions and inflationary periods since its founding in 1982, Ross Stores (ROST -0.36%) has proven itself time and time again. This may lead a dividend investor to ask themselves whether the stock could be a buy for their portfolio.
Let's dig deeper into Ross Stores' fundamentals and valuation to resolve this question.
Ross' secret sauce produced another great quarter
What consumer doesn't enjoy a good bargain? As the country's largest off-price retail chain, Ross Stores is also arguably best at offering the latest styles to customers on the cheap. The company combines its tremendous purchasing power with a conservative presentation approach (i.e., no expensive fixtures or decorations in its stores) to pass the savings on to its customers.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Comparable store sales growth rate | (7%) | 1% |
| Total store count | 1,951 | 2,034 |
| Net margin | 7.8% | 8.3% |
Data source: Ross Stores.
Ross Stores' sales grew by 3.7% year over year to $4.5 billion in its fiscal first quarter, ended April 29. What was behind the company's solid top-line growth? It isn't a secret that high inflation has harmed the discretionary incomes of Ross' customers. But because of the company's affordable price points, comparable transactions were slightly up and drove comparable sales growth for the quarter. Coupled with a rise in Ross' total store count, this explains the healthy growth in the quarter.
Ross' diluted earnings per share (EPS) surged 12.4% over the year-ago period to $1.09 during the fiscal first quarter. Thanks to the company's disciplined cost management, total costs increased by just 3.2% for the quarter. This is what resulted in Ross' net margin expanding by over 40 basis points in the quarter. Along with a decline in its diluted share count from share repurchases, this is why diluted EPS rose ahead of sales during the quarter.
As Ross continues to open more stores, the growth outlook remains bright. Analysts are projecting that the company's diluted EPS will compound by 10.1% annually over the next five years. For context, that's just below the apparel retail industry average annual earnings growth prediction of 11.5%.
Image source: Getty Images.
A payout that has skyrocketed in recent years
Compared to the S&P 500 index's 1.7% dividend yield, Ross' 1.3% dividend yield probably doesn't stand out to income investors. But with the quarterly dividend per share soaring nearly fourfold in the past 10 years, the stock certainly should get the attention of dividend growth investors.
Ross' dividend payout ratio is poised to clock in at just 27% in the current fiscal year set to end in January 2024. That allows the retailer to retain the capital needed to open new stores, repurchase shares, and repay debt. This is why I would be surprised if the dividend didn't grow at a double-digit rate annually for at least the next few years.
The stock is rationally valued for an industry leader
Because Ross is seen as a recession-resilient play for investors, shares of the stock have unsurprisingly gained 14% in the past 12 months. Yet, Ross still looks like a buy for dividend growth investors.
The stock's forward price-to-earnings ratio of 19.3 is only marginally above the apparel retail industry average of 17.6. That's hardly an excessive valuation multiple for a leader within the off-price retail landscape.
