I was able to come up with enough cash to make one final purchase in my Empire portfolio this month. This was a small purchase that barely passed my “commissions have to be < 1% of trade value” rule, but I was only willing to open up a small position in this company anyways. If I end up being correct about this company’s future I can always add on later.
The stock that I decided to purchase was Stage Stores (SSI). SSI has scored very well in my dividend growth stock ranking screen for the last couple of months so I’ve been keeping my eye on it. I almost pulled the trigger a month ago when SSI was trading at just over $17 per share. Boy am I glad I waited!
SSI has been absolutely hammered over the last week and a half. This was initially due to a rather gloomy earnings report which was then exacerbated by the market correction. SSI fell to a low of $9.45 back on August 24th and has since rebounded to around $11 per share.
Because of this dramatic decrease in the stock price and a recent dividend increase, the SSI dividend yield is now at an all-time high of over 5%. While SSI is facing several macro headwinds I believe that they are short-term and SSI has strategies in place for long-term growth. The dramatic drop in share price appears to be an overreaction and provides a great opportunity to jump in, and I was able to pick up 50 shares last week at $10.81.
Stage Stores, Inc. is a regional department store retailer, which offers moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. It operates its stores under the five names: Bealls, Goody’s, Palais Royal, Peebles and Stage. The company also offers its merchandise direct-to-consumer through its eCommerce website and Send program. Source – TradeKing.
Let’s get the bad news out of the way. SSI’s second quarter earnings fell short of expectations due to a weak peso, economic softness in several states that were impacted by oil industry layoffs, and decreasing margins caused by accelerated markdowns. Because the company expects these headwinds to extend through the remainder of the year they lowered their earnings guidance to $1.05 – $1.15 (previously $1.20 to $1.28). All terrible news, right? But does it warrant an almost 50% drop in share price?
Despite these headwinds sales increased 0.9% and comparable sales increased 0.8%. Additionally, the expansion of SSI’s omni-channel presence resulted in 21% direct-to-consumer growth – an area that should not be affected by regional economic softness. SSI announced plans to close approximately 90 underperforming stores which should improve efficiency and benefit earnings. SSI is also increasing their emphasis on trends and style and improving store environments.
It may take some time, but these strategies should drive long-term growth. What do I get while I wait? A juicy 5.5% dividend!
SSI has been paying dividends since 2005 without a cut. Shortly after their recent earnings report, SSI announced a $0.15 quarterly dividend – a $0.01 increase (7.1%) over the previous quarter. This represents the 6th consecutive annual dividend increase.
Even with the lower earnings guidance, SSI’s dividend payout ratio remains at a very reasonable 55%. With their dividend track record and apparent commitment to shareholders I view their dividend as sustainable. Although the percentage increases have declined recently, I believe they will ramp up again once SSI’s growth strategies begin to bare fruit. Besides, I’m not going to expect 15-30% dividend growth out of a stock already yielding over 5%!
I realize that this is a somewhat risky play and that is why I am only committing a small amount of capital. I like the direction the company is going and it’s tough to pass up a 5% yielding apparel company with a PE ratio near 10 – so I nibbled. If SSI picks up some steam I’ll feel comfortable adding a bit more.
Stage Stores (SSI) Purchase Details
- Sector: Consumer Discretionary
- Industry: Apparel Retail
- Purchase date: 8/27/2015
- Portfolio: Dividend Empire Portfolio
- Shares purchased: 50
- Cost per share: $10.81
- Commissions: $4.95
- Cost basis: $545.44
- Yield on cost: 5.50%
- Forward income: $30
These 50 shares of SSI add $30 of forward income to my portfolio, bringing the total up to $809.63. I got in just before the ex-date so I can expect my first payment in a couple of weeks.
My Dividend Empire portfolio has been updated to reflect my small stake in SSI.
What are you thoughts on SSI? Please let me know in the comments section below!