Macy's: Low Valuation and High Yield
12/05/2017 5:00 am EST
Macy’s (M) was founded in 1858 and has grown to be one of the nation’s largest retailers, operating more than 700 stores under the Macy’s and Bloomingdale’s names, and about 150 specialty stores, notes income Ben Reynolds, editor of Sure Retirement.
More recently, Macy’s recently emphasized the importance of its digital channels with the hiring (8/21/17) of eBay Senior VP Hal Lawton as the new Macy’s President.
Lawton was previously a key player in eBay’s turnaround efforts after it split from PayPal. Subsequently, the company announced (8/22/17) a new merchandising structure that would rely heavily on data science.
Macy’s growth prospects rely entirely on its ability to shift from its traditional brick-and-mortar business model to an omni-channel shopping experience. The company’s recent executive changes show that it is laser-focused on growing this promising sales channel.
Despite its high yield, Macy’s dividend is very safe. The company is on track to pay $1.51 in dividends in fiscal 2017, while adjusted earnings-per-share estimates are around $3.40 for a forward dividend payout ratio of less than 50%.
From a recession perspective, the company’s earnings declined by ~41% during the Great Recession but recovered most of this lost ground within 2 years.
While Macy’s shares are down nearly 50% over the past twelve months, the company’s sales declined by just 5.4% in the most recent quarter.
This has resulted in Macy’s trading at a p/e ratio of just 5.4x (using 2017 earnings estimates). For context, Macy’s average price-to-earnings ratio over the past 10 years is about 13, more than twice its current level.
Macy’s also owns a tremendous amount of valuable real estate. In January of 2016, activist investment firm Starboard Value published research implying that the value of Macy’s real estate totaled $21 billion while its enterprise value was just $19 billion.
While the numbers have changed slightly since this research was published, we believe the conclusion remains the same: Macy’s intrinsic value is secured by its base of valuable tangible assets.
To unlock this value, Macy’s has been closing less productive stores and selling the underlying real estate ($673 million of sales in 2016) while using the proceeds to repurchase stock and improve the company’s best-performing locations.
Macy’s low valuation is the defining characteristic of this investment opportunity. If sales stabilize, its valuation should expand, generating fantastic returns in the process. The 8.2% yield is a bonus.