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Retailing is the sector that everyone loves to hate right now. Many retail stocks, including Wal-Mart Stores (NYSE: WMT), Target (NYSE: TGT), and Macy’s (NYSE: M), have performed poorly this year, as earnings growth has come down significantly in recent months.
Investors have been extremely disappointed, and understandably so. Coming into 2015, the retailers had wind in their sails. Gas prices were low, the housing and labor markets were recovering, and consumers had more money to spend.
Unfortunately, these retailers missed the party and sales have declined in recent quarters. The big question for investors now is whether the pervasive negativity has gone too far. These three retail stocks are now cheap and offer high dividend yields. They could be great values for investors willing to buy when nobody else wants to.
Beyond the Pessimism
Investors are shunning retail stocks broadly, based mostly on fears that increasing competition from Internet retailers like Amazon.com (NASDAQ: AMZN) will be a death-blow to retailers that still operate brick-and-mortar stores. But some perspective is warranted.
First, physical retail isn’t going away any time soon. The U.S. Census Bureau states that e-commerce sales, while growing rapidly, still represented just 6.8% of total U.S. retail sales last quarter. As a result, it seems that brick-and-mortar still serves a role for the American consumer.
And, even as it pertains to online retail, both Wal-Mart and Target have invested significantly in building their e-commerce businesses. Wal-Mart’s e-commerce business grew revenue by 10% last quarter. Target realized 20% growth in digital channel sales last quarter. It’s encouraging to see their investments paying off.
Wal-Mart and Target are seeing increased traffic and conversion on mobile, and due to their large sizes and significant distribution, they are optimally position to capitalize on e-commerce heading into the holiday shopping season.
Macy’s stock has been beaten down because of its poor sales reports throughout the year. For example, last quarter comparable-store sales fell 3.6%. But some of this decline was due to warmer-than-expected weather in the fall season, which delayed purchases of cold-weather apparel.
And, Macy’s has tremendous real estate value that some analysts believe is highly undervalued. Starboard Asset Management recently published a note pegging Macy’s real estate value at $21 billion. Considering Macy’s entire market capitalization is just $12 billion, there could be significant value here.
Retail Stocks With Dividends
The steep declines in retail stock prices have presented deep discounts as valuation levels across the retail industry remain compressed. Wal-Mart and Target trade for 14 times forward earnings estimates, which are discounted levels compared to the S&P 500. Macy’s is even cheaper, trading for just 9 times forward EPS estimates.
In addition, their falling stock prices has propped up their dividend yields. Target offers a 3% yield, Wal-Mart yields approximately 3.4%, while Macy’s yield is closer to 3.8%. These are attractive levels of income, and those dividends are only poised to grow from here.
Wal-Mart and Target are both S&P 500 Dividend Aristocrats, having raised their payouts for 42 years and 41 years, respectively. Target’s five-year compound annual dividend growth rate is 17%, a very solid number. Macy’s in particular is an excellent dividend growth stock. It has increased its dividend by 48% per year over the past five years.
Retail has had a rough year, and investors have rushed for the exits. But if all the bad news is priced in, and these retailers have a strong holiday shopping season, their stocks may be attractive buying opportunities for value and income investors.
DISCLOSURE: Bob Ciura personally owns shares of Macy’s (NYSE: M).
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