Cato Corp (CATO): A Stock for the Stoic Investor

There doesn’t seem to be much to like about Cato at first glance, but consider the following:

– The company has no debt.

– The dividend yield is 3.7%, one of the highest in the industry.

– By virtue of their geography, Cato’s chains have less physical competition than their Northeastern peers, e.g. the Lane Bryant and dressbarn stores operated byAscena Retail Group Inc (NASDAQ:ASNA). (Otherwise, they are very similar to Ascena’s stores, competing at similar price points and offering similar merchandise. Cato lacks Ascena’s dedicated tween and plus-size chains, but does cater to those markets in its Cato and It’s Fashion stores.)

– Each member of the senior management team has been with the company for at least 20 years, and the team has a history of creating value.

CATO data by YCharts

If the business stagnates but holds its ground, investors should enjoy the steady dividend, which has a little room to grow. (The payout ratio stands at 44% now.)

The risk is that the company may fail to keep up with consumers’ ever-evolving tastes on one hand and with rivals’ competitive pricing on the other. The Cato chain is especially reliant on private labels, which are intended to be more fashionable than discount chains’ brands but more affordable than mall stores’.

Although private labels tend to be portrayed as more profitable than national brands, Cato’s chains achieve profit margins comparable to those of the T.J. Maxx and Marshalls chains operated by The TJX Companies, Inc. (NYSE:TJX). T.J. Maxx and Marshalls compete at price points similar to Cato, yet benefit from stocking designer goods that enjoy substantial brand recognition. It’s no wonder that TJX has outperformed its peers over the last twenty years.

As I explained in September, however, TJX is priced for perfection. (The jury’s still out on whether I was right; the TJX stock price fell right after publication, but rebounded enough that the stock is where it was.)

I’m pretty excited about this stock, but I’ve never visited a Cato store. The closest one is an hour away. Yelp reviews for Cato, It’s Fashion, and Versona in particular are positive, but nothing can substitute firsthand experience.

Readers, what do you think of Cato stores?

The article A Stock for the Stoic Investor originally appeared on Fool.com and is written by Jonathan Lim.

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