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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!