Staples, Inc. (SPLS), Advance Auto Parts, Inc. (AAP): Buy These Names Before They Increase Their Dividends

Page 1 of 2

Recently, some hard-line retailers have been raising their dividends, which has led to exceptional share price increases. Two of the most important examples are increases in dividends announced by NIKE, Inc. (NYSE:NKE) and Williams-Sonoma, Inc. (NYSE:WSM) in March. Since then both stocks have been up by 12% and 24%, respectively. However, an interesting note for investors is that some retailers are just around the corner from announcing dividend hikes, which has obviously not been factored into the stock prices given that investors have been holding back on the stocks amidst uncertainty.

Why should these companies announce dividend hikes?

Staples, Inc. (NASDAQ:SPLS)

Companies with solid recurring free cash flow combined with low (or no) current dividend payout ratios are destined to increase their dividends. Currently, within hard lines, four companies already pay dividends with yields above the Treasury rate (Best Buy Co., Inc. (NYSE:BBY), The Home Depot, Inc. (NYSE:HD), Staples, Inc. (NASDAQ:SPLS), and Williams-Sonoma). However, taking a lesson from Williams-Sonoma, Inc. (NYSE:WSM), whose recent dividend increase was applauded by the market, it may make sense for others to follow suit. Hence, with the 10-year Treasury yielding 2.3%, dividends represent an increasingly attractive way to generate investment return.

Moreover, higher yielding stocks are currently being rewarded with better valuations. Across consumer segments, high dividend-yielding stocks (which are defined as having yields above 2.5%) are currently commanding PEG (Price/Earnings to Growth) multiples 37% higher than low-yield names.

Which companies?

Up until now, I haven’t disclosed which companies are likely to announce dividend hikes. Let’s have a look at four potential players:

The analysis across the consumer-goods sector screens us the best four companies that are possibly expected to raise their dividends in the near future, which will serve as a potential catalyst for stock-price movement.

Staples, Inc. (NASDAQ:SPLS) has been viewed as a favorable company by investors after the merger of Office Max and Office Depot Inc (NYSE:ODP). On May 22, Staples reported another weak quarter, as top-line sluggishness could not make up for pricing declines and investments in infrastructure in contracts.

The company appears to have changed its strategic direction over the past year. It appears to be focusing much more on the top line by reducing pricing, increasing support in contracts and pushing its 5% rewards card to all items. To date, that has not resulted in measurable top-line improvement but it has created measurable margin contraction. It may be a necessary move to be competitive with Amazon.com, Inc. (NASDAQ:AMZN) and other online players, but this quarter showed the steepest decline in both retail and contract margins. Indications on the call are that further pricing reductions are ahead, which will keep pressure on margins.

Two items that will keep Staples, Inc. (NASDAQ:SPLS) as an interesting company at this stage are the benefits that should accrue from the merger and evidence internationally that the expense savings are accelerating. The hope is that market share gains, as consumers appreciate the pricing and service moves, lead to improving comps, which in turn arrests the margin deterioration.

Weak margins for Advance Auto Parts

Similarly, Advance Auto Parts, Inc. (NYSE:AAP) is viewed as the poor house in a very rich do-it-yourself auto neighborhood. That analogy reflects weaker comp and margin results over the last few years. In its recent conference call, the company laid out its investments and strategy to close the gap and more importantly, to significantly improve the company’s commitment to commercial customers. Some of these have been overdue and the Street applauds management’s willingness to make the investments even in a sluggish top-line environment. These investments should drive stronger sales as customer inquiries will be filled more often; however, there might not be any material impact in the near term.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Click here to Read Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 74 percentage points in 2.5 years. Our beta is only 1.2 (download a FREE newsletter and see the details inside)

Lists

Best Selling Magazines in the World

Shortest People in History

The Most Celebrated Holidays in the World

Most Expensive Handbag Brands in the World

Top Selling Comic Book Issues of this Century

The Most Powerful Women in Politics

Best Paid DJs

Most Rebellious Female Artists

Best Paid TV Actresses of 2014

Best Paid Actors of 2014

Most Expensive Horses in the World

Tallest People Ever

Most Encouraging Feminist Celebrities

Best Paid Supermodels of 2014

Top 10 Suburbs for Retirement in 2015

10 Wealthiest Cities in America

Top 10 TED Talks for Entrepreneurs

Best TED Talks on Education

25 Most Dangerous Places to Live in America

Top 10 Ski Resorts in the United States – 2014 List

Top 10 Most Remote Places in the World

Most Visited Museums in the United States

Wealthiest Photographers in the World

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!