A couple of weeks ago I kicked off a series to review a handful of the most compelling dividend-paying companies in the S&P 500. I narrowed down a list of five companies with the highest yield and five with the fastest-growing dividend payments over the past 10 years to four companies with long-term potential that are worth further research.
Today I kick things off with Tiffany & Co. (NYSE:TIF). Most dividend-seeking investors won't have Tiffany & Co. on their radar because its current dividend yield of 0.9% isn't large enough to get their attention. However, its ability to grow its dividend at a compound annual rate of 24% makes it interesting enough for me to take a peek.
The business
I trust everyone is familiar with Tiffany's fine jewelry and its well-known and well-regarded brand, so I won't spend much time here. The company is international but heavily reliant on the U.S. and Japanese markets. Two-thirds of its stores are in those two countries, and the remaining ones are in the U.K., Australia, China, Hong Kong, Singapore, and a few other locales. That mix should change over time, and the company is opening stores in new markets each year and expanding its presence in China.
The company has also made a strategic decision to own the land and building for its flagship stores in New York, London, and Tokyo. The Tokyo store, located in the plush Ginza shopping district, is leased to department store company Mitsukoshi, which operates the flagship store and many of the company's other stores in Japan.
Many investors consider Blue Nile (NASDAQ:NILE) to be a competitor to Tiffany & Co, and there is some truth to this, but the overlap isn't as great as many would assume. Both sell fine jewelry and each is well known for engagement rings, but Blue Nile is more targeted toward men and Tiffany directs its efforts toward women. Tiffany also sells not just the best products around, but also the cachet of its brand. From a competitive standpoint, Bulgari, Hermes, and LVMH Moet Hennessy Louis Vuitton are the companies shareholders should be most concerned with now.
The financials
A great brand and tradition are wonderful, but ultimately not worth much if the company doesn't have a firm financial foundation. Fortunately, investors have little to worry about here. Tiffany has a rock-solid balance sheet with a fair amount of debt that is all financed at attractive long-term rates. The table below details some of the company's operating metrics. As you can see from its free cash flow (FCF), the company easily funds its dividend and should have little problem funding its debt.
| Metric | Five-Year Compound Annual Growth Rate (CAGR) |
|---|---|
| Sales CAGR | 7.5% |
| EPS CAGR | 6.9% |
| FCF CAGR | 8.5% |
| Diluted Share Count CAGR | -0.8% |
| ROA** | 8.8% |
| ROE** | 14/4% |
*4-year CAGR; 5-year CAGR was not meaningful.
**Trailing 12 months.
Tiffany has been able to achieve consistent, though not robust, growth over the past five years and the table above backs that up. Of the metrics above, the decline in share count is most interesting because it's relatively uncommon.
Valuation and final thoughts
While Tiffany & Co. is a great company and one I would certainly consider owning, I won't be purchasing shares any time soon. My FCF-based discounted cash flow analysis reveals that investors expect the company to grow FCF at 8% to 10% a year for the next 10 years and then 3% thereafter. While those rates are close to what the company has achieved over the past five years, I don't feel comfortable assuming such strong growth 10 years into the future. However, if the shares were to trade near their current 52-week low of $28.60, I would have to revisit my decision.
Unfortunately, Tiffany's doesn't make the immediate cut as an investment, but it's certainly a company I'll be keeping on my watch list. Next week I'm off, but I'll pick up two weeks from now with a similar look at UST (NYSE:UST) and its 5.2% yield, which is certainly high enough to meet most dividend seekers' appetite for yield.
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Nathan Parmelee has been to the Tiffany store in Ginza a couple of times, but managed to leave without making a purchase. Nathan owns shares in Blue Nile. He has no financial stake in any of the other companies mentioned in this article. The Motley Fool has a disclosure policy . Blue Nile is a Motley Fool Hidden Gems and Motley Fool Rule Breakers selection.
