Retail is a difficult business. There is a lot of competition and there are always new stores popping up that try to target different parts of the market. As a result, success in retail is generally fleeting, and it often seems easier to pick the losers than to pick winners. Therefore, I tend to stay away from retailers as an investor. Nevertheless, there is a place for retailers in your portfolio. After all, retail is an essential part of the economy, and the best retailers have been wildly successful.
One way to go about choosing retailers is to find one among the Dividend Aristocrats. Dividend Aristocrats are companies that have raised dividends every year for at least 25 years. Companies with such a track record have proven the following:
- It can generate free cash-flow consistently.
- It has sustainable business models.
- It’s shareholder friendly.
- It can grow its businesses.
There aren’t many retailers among the Dividend Aristocrats, which is an honor that is often reserved for consumer staples companies and utilities. However, when you find a retailer among the group, it may be a good idea to latch on, because these companies have found a market niche and proven that it can buck the trend and succeed over the long run. Here are four worth considering.
1. Lowe’s (NYSE:LOW)
Lowe’s is the second largest home improvement retailer behind Home Depot (NYSE:HD), but in terms of dividend increases Lowe’s might be the superior investment. The company has raised its dividend for an incredible 51 consecutive years. While it is a little expensive at 21-times earnings, the company is growing. Judging by the company’s financials versus Home Depot’s, it appears that it is taking market share.
Lowe’s is a low-margin business, but the company has been consistently profitable, and it has a conservative dividend policy. It pays just $0.72/share versus earnings of $2.14/share. This means that the company can pay its dividend in a weak economic environment, and it has room to raise it in the future.
For now, I would hold off on buying Lowe’s because of its somewhat rich valuation, as well as the potential for weakness in the housing market. But in the long run, this is a stock that is worth buying, especially in a bear market.
2. Target (NYSE:TGT)
Target has grown its dividend for 46 consecutive years. It has proven to be one of the world’s most successful retailers by selling a wide variety of products at low prices. Target may be an interesting bet to make right now because its stock has been weak as a result of December’s security breach. Investors are concerned that consumers might be reluctant to use their credit cards at Target. But this should only be a temporary matter.
Furthermore, now that Target has been a victim of a cyber attack, it will likely be better prepared in the future to avoid one. So for now, I expect Target’s numbers to be weak, and this was evidenced by the profit decline we saw in the latest quarter. But the company is still well-positioned to pay its nearly 3 percent dividend, and it is also positioned to raise it. As an investor who likes to buy when others are fearful, I think target is a really interesting pick despite the weak retail environment in the U. S., and its long-term consistency bolsters my confidence.
3. Wal-Mart Stores (NYSE:WMT)
If you are looking for safety and consistency, Wal-Mart is one of the best stocks you can own. The company has raised its dividend for 39 consecutive years, and its payout is low enough so that it can keep doing so.
Wal-Mart operates big box retailers all over the world, but mostly in the United States. It competes on both price and variety, and it is difficult to beat Wal-Mart on either of these. This is because the company is so large, and it therefore has the ability to buy in bulk. It also has an incredible distribution network.
Wal-Mart shares were weak last week because the company reported earnings that missed analyst expectations, but I think that this presents a long-term opportunity. The stock broke out of a long term consolidation period during which it traded from about $45/share to $70/share for over a decade. For the past couple of years, it has been consolidating above the $70/share level, and I think that longer term it is poised to go much higher. Investors are encouraged to take a position in the low $70’s.
4. Walgreen Company (NYSE:WAG)
Walgreen Company is one of the leading operator of drug stores in the United States along with CVS Caremark (NYSE:CVS). However, Walgreen is the only “pure play.” Walgreens throughout the country offer consumers competitive prices on a wide variety of items from healthcare products to groceries, hardware, and cleaning supplies — among other things. The company’s brand power along with its competitive prices has made it a survivor in the retail space. As a result, it has been able to raise its dividend for 38 consecutive years.
Right now, the stock is fairly expensive, as it trades at 23 times earnings. However, it has been growing its earnings, and as a result the stock has more than doubled since the middle of 2012. Investors are optimistic about the company because not only is it growing, but it is recession resistant. This is an excellent combination that you want in your portfolio. However, I still think prudent investors should wait for a pullback before taking a long-term position.
Interested in the retail space? Earlier, we took a detailed look at the discount retail arena and analyzed stocks such as Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO) vis-a-vis Wal-Mart. Here’s a recap from our older article:
Whenever the stock market declines, it is helpful to take a look at some of the stocks that are outperforming and consider adding them to your portfolio. Often, this outperformance can be seen in defensive sectors such as utilities and consumer staples. Another sector that I think investors should follow, especially given its weak performance towards the beginning of the year, is the discount retail space.
Discount retailers had a rough couple of months at the beginning of 2014. Wal-Mart — the leader of the group — saw its stock price decline 10 percent into early February before rebounding. Weakness in the shares of dollar store operators such as Dollar General and Family Dollar saw weakness going into April.
However, before jumping in, keep in mind that while these have been solid businesses they are very difficult to operate. One of the past leaders in the dollar store industry — Family Dollar — has recently seen weakness and it is being forced to close down stores in order to protect its margins. The stock has been generally weak. While other companies such as Dollar General and Wal-Mart have been stronger, we have also seen their margins compressed, and even a small managerial slip up can seriously harm these companies’ profits.
The best way to get exposure to the discount retail sector is to simply buy Wal-Mart shares. Wal-Mart may not have the lowest prices in the industry, but it does have an incredible network of distribution centers and connections with manufacturers in China that ensure that the company remains America’s leading discount retailer. The company also trades at a lower price to earnings multiple than its dollar store counterparts — 16 times earnings versus 17-18 times earnings. This is only a slight discount but that can lead to large returns going forward.
Ultimately, despite claims of an economic recovery a lot of consumers continue to struggle. Therefore, they are more likely to shop at discount retailers. Whenever we have weakness in the stock market, investors are reminded of this fact and they start to bid up shares of Wal-Mart and its peers. This is happening now, and for investors who want stock market exposure but who are concerned about economic weakness, these stocks offer an intriguing opportunity.
Disclosure: Ben Kramer-Miller has no position in any of the stocks mentioned in this article.