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Top Picks 2020: Ethan Allen Interiors (ETH) and Kohl's (KSS)

01/24/2020 5:00 am EST

Focus: CONSUMER

John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

In selecting his favorite investment ideas for the year ahead, John Dobosz, editor of Forbes Dividend Investor, highlights a pair of stocks in the retail sector — a leader in home furnishing and a department store chain.

Danbury, Conn.-based Ethan Allen Interiors (ETH) makes furniture and home accessories which it sells through a network of retail stores and via wholesale networks. The company has a market cap of $504 million and a dividend yield of 4.4%.

Shares trade at substantial discounts to five-year average valuation multiples on measures such as price to earnings, price to sales, price to book value and price to cash flow. Ethan Allen has paid off all its nearly $200 million in long-term debt since 2010, making the company debt-free today.

Free-cash flow over the trailing 12-month period of $1.65 per share is more than sufficient to sustain and increase $0.84 in regular annual dividends. The company has also paid special dividends in 2012, 2018, and 2019. Ethan Allen hiked the quarterly payout from $0.19 to $0.21 in 2019.

With more than 1,100 stores, Menominee, Wis.-based Kohl’s (KSS) is the largest U.S. department store chain. Its has a market cap of $7.9 billion. The stock looks cheap after it was thrashed in November due to lackluster quarterly results and lower forecasted profits.

Kohl’s trades 13% below its five-year average price-earnings ratio, 24% below its average price-sales ratio, and 5% below its five-year average price-to-cash flow multiple. Revenue in the year ahead is expected to grow 1.8% to $19.3 billion, with earnings stagnant at $4.85 per share.

Kohl’s is a cash machine, generating $5.82 in free cash flow per share over the past 12 months, more than double the annual dividend payout of $2.68 per share. The stock has a dividend yield of 5.3%.

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