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Why Bed Bath & Beyond Inc Is Instituting a Dividend

By Motley Fool Staff - Apr 23, 2016 at 7:44AM

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A look at where Bed Bath & Beyond is sitting right now, how it's hoping a dividend might change that, and why the market isn’t quite as optimistic.

Along with better-than-expected Q4 results, Bed Bath & Beyond (BBBY 4.74%) recently announced plans to start paying a quarterly dividend.

In this clip from the Motley Fool Money podcast, Jason Moser, Andy Cross, and Chris Hill talk about what the home furnishings retailer might be trying to accomplish with this. They look at why Bed Bath & Beyond has struggled so much in the past few years, why it might have chosen now as the time to pay a dividend, and why the market might question its ability to actually pay shareholders every quarter.

A transcript follows the video.

This podcast was recorded on April 8, 2016. 

Chris Hill: Shares of Bed Bath & Beyond popping on Thursday, after fourth-quarter profits came in higher than expected. Good quarter, Jason, but what caught my attention was, they're going to start paying a quarterly dividend. I don't think you make that move unless you feel you can deliver on that.

Jason Moser: Well, let's hope they can deliver on that. I think the market is kind of questioning that right now. Certainly, the market is wondering what the future holds for a business like this. Dividend is certainly a nice start. It's a fair question as to how much investors can expect that to grow over time. Just, an interesting situation they're faced with, because Bed Bath & Beyond as a business has done so well for so long because it served as that place to find home furnishings. But as e-commerce has quickly taken over, the competitive landscape has changed significantly in a short amount of time.

You look at the numbers here with Bed Bath & Beyond, the share count, they did a good job, actually, buying back shares. Going back to 2011, they brought the share count down 36%. And this is while the share price hasn't really performed all that well, either. So, in theory, they're getting a pretty decent value on the shares. At the same time, earnings per share have risen around 65%. So, that means those buybacks are helping, at least in that regard. The problem is, it's not translating to a stock price. It's still garnering a multiple less than 10 times earnings. That's not really a very optimistic situation for these guys. You would think the market might give it some credit and boost that multiple a little bit. But I think the questions about its future are fair. It's not an impaired business, but I'm not actually convinced that it won't be bought out by private equity at some point here.

Andy Cross: But Jason, it generates a $1 billion in cash flow, spends $1 billion in buying shares every year, pays $300 million in capital expenditures. Where is the dividend? So, there are concerns about, how is that cash flow going to materialize? That cash flow hasn't really grown tremendously over the last five years.

Hill: Do you think that at least part of what fueled the dividend was an attempt to appeal to institutional investors? Just thinking, "You know what? If we start paying a dividend, there's a wider pool of institutional investors who will at least kick the tires on our stock?"

Moser: Perhaps. I don't know if that would really be a selling point of the stock. I think, really, what they're trying to do is look at -- it's a relatively mature company, been around for a while, generates a lot of cash flow, it's not like it's an insignificant business. I feel like maybe, they feel like maybe this is a step in the right direction, they can become a little bit more of a stable, reliable company with a reputation, if they're able to offer up a consistent and growing dividend over time.

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