Staples, Inc. (SPLS): One of the Best Kept Retail Secrets

Last but certainly not least, RadioShack trades at the lowest market value of our five stocks at just over $200 million, making it an interesting takeover candidate. Adding to this is the fact that the stock is down over 75% year to date. The electronics company is seeing similar weakness to that of Best Buy and suspended its dividend earlier this year. RadioShack also saw billionaire investor Jim Simons dumping all his shares in 3Q (check out Jim Simons’ other stock picks).

From a valuation and dividend-paying standpoint, we believe Staples is the most attractive pick of the bunch. Staples has managed to grow its dividend the most over the last five years at 9%, beating out the other dividend-paying retailers OfficeMax and Best Buy. Expected earnings growth metrics for the next three years put Staples (7.4% CAGR) and Best Buy (6.5% CAGR) at the top of heap; the other retailers mentioned above are expected to see negative growth.

Thus, we can see that Staples and Best Buy are the clear industry giants, but Staples stands above Best Buy on a balance sheet and dividend-paying basis. Staples has a debt to equity ratio of only 27%, compared to Best Buy at 57%. In terms of cash flow from operations, Staples’ payout is only 33%, while Best Buy has paid out well in excess of its entire cash flow over the last twelve months.

In short, we believe that Staples is a standout in the office products segment, while giving investors a solid dividend. The key to the retail industry is that there are still consumers who are more intrigued by actually viewing and testing products before buying. There has been much speculation on whether or not these consumers still exist, but now they are using the brick-and-mortar stores as a showroom, so to speak, for lower-priced online retailers.

Obviously, this is one of the biggest issues going forward for Staples, as it must convert these visiting shoppers to actual paying customers. Even so, Staples still has a leg up over top rival Best Buy, given that many of its products are not major purchases, and it provides less of a price difference between in-store and online goods. Interestingly, two of our five retail stocks discussed here are also in our list of top stocks in the hedge fund industry (see our entire Top Ten here).