L Brands: PINK to Victoria's Secret

09/19/2018 5:00 am EST

Focus: CONSUMER

Ben Reynolds

CEO, Sure Dividends

L Brands (LB) is a diversified specialty retailer that operates a variety of brands, including Victoria’s Secret, PINK, and La Senza, notes Ben Reynolds, income specialist and editor of Sure Retirement.

The firm operates 3,069 company-owned specialty stores. Its brands are sold in more than 800 additional franchised stores around the world. L Brands was founded in 1963 and currently trades with a market cap of $7.3 billion.

L Brands has been expanding its e-commerce capabilities while also opening new stores — especially in international markets. China in particular is an attractive international market. The company has 7 stores in China right now and plans to build an additional 10 during the remainder of 2018.

Due to the tailwinds presented by expansion into China and the company’s e-commerce efforts, we believe that L Brands should be capable of delivering — 5% earnings-per-share growth over full economic cycles.

The company made a significant guidance revision with the publication of its second-quarter earnings report. The company now expects to generate full-year earnings-per-share between $2.45 and $2.70, which is a significant decline from prior guidance for $2.70 to $3.00 of earnings-per-share. L Brands’ stock has declined by nearly 20%

L Brands currently pays $2.40 per year in per-share dividend payments and is guiding for $2.58 in earnings-per-share in fiscal 2018 at the midpoint. This implies a payout ratio of 93.0% (using earnings).

The company’s dividend is barely covered by its earnings, so income investors should monitor the firm’s financial performance closely moving forward.

Using the midpoint ($2.58) of L Brands’ 2018 financial guidance, the company is currently trading at a price-to-earnings ratio of 10.2. L Brands has traded at an average price-to-earnings ratio of 17.0 over the last decade. The company is extremely undervalued today, and our fair value estimate on the stock is $44.

Between valuation expansion, dividend payments, and some modest business growth, we believe that L Brands has a chance of delivering 20%+ total returns moving forward.

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