The share price of Best Buy Co. Inc. (BBY, Financial) has recovered somewhat since last October, but is still low enough to offer a 4.27% dividend yield. Additionally, it remains an undervalued stock.
As the following price chart shows, shareholders of the electronics retailer have been on quite a ride since early 2020.
Because of its continued earnings growth, I expect the company’s yield to be sustainable in the short and long term.
About Best Buy
The company’s blue and yellow signs will be familiar to anyone who travels to shopping malls in North America. It is best known as a computer and mobile phone seller, but also carries consumer electronics, appliances and gaming hardware, software and even drones.
There is also a services operation that provides consulting, installation, repairs and more. It even has a section called Other that sells such items as baby products, food and beverages and outdoor living products.
At the end of fiscal third-quarter 2023 (fiscal years wind up at the end of January), it had 1,139 stores in the U.S., Canada and Mexico. Based in Richfield, Minnesota, Best Buy has a market cap of $19.24 billion and trailing 12-month sales of $47.59 billion.
Competition
Best Buy reported in its 10-K filing for fiscal 2022 that its competitors are mainly multi-channel retailers, e-commerce businesses and technology service providers. It believes it has competitive advantages, starting with efficient operations and economies of scale. In addition, it said:
“We believe our dedicated and knowledgeable people, our integrated online, retail and in-home assets, our broad and curated product assortment, our strong vendor partnerships, our service and support offerings designed to solve real customer needs, our unique ability to showcase technology in distinct store formats and our supply chain are important ways in which we maintain our competitive advantage.”
Both the company and the S&P Retailing Group outperform the S&P 500:
Its margins are about average for the retail- cyclical industry.
Financial strength
Best Buy carries some debt, but with an interest coverage ratio of 71.28, we know it is relatively insignificant, at least in the context of operating income. Backing that up is an Altman Z-Score of 4.22, which is well into the safe zone and indicates it is in good standing.
It is also a value creator, which we see in the weighted average cost of capital versus return on invested capital chart:
Profitability
The retailer's margins are unexceptional, with gross, operating and net margins roughly in line with the industry. However, it has an exceptional return on equity of 48.59%. It has also been profitable for nine of the past 10 years.
Growth
As noted earlier, the company reported that one of its competitive advantages is its efficient operations. That is backstopped by a look at its growth rates:
- Three-year revenue growth rate: 10.9%
- Three-year Ebitda growth rate: 17.4%
- Three-year earnings per share without non-recurring items growth rate: 21.3%
The company has been able to turn revenue growth into even higher profit growth, the mark of an effective and efficient operation.
Add to that an impressive free cash flow growth rate, with an average of 11.19% per year over the past 10 years and a three-year average of 21.3%.
Dividends and share buybacks
At the close of trading on Feb. 22, Best Buy was offering a dividend of 4.27%:
The yield is relatively high, more than twice the S&P 500 average of 1.87%, partly because the price slumped so far in recent months. But it is also because the company has consistently and significantly increased the dividend payout, at an average of 19.13% per year over the past five years.
Even so, the dividend payout ratio is only 0.50, so it has room for more increases.
In addition, there have been aggressive share repurchases. Over the past decade, the number of shares outstanding has dropped by an average of 3.98% per year and by 5.02% per year over the past five years.
Shareholders have been well rewarded. Investors who have held the stock for the past 10 years have earned an annualized return of 17.18%. However, those who have owned for only the past five years will have earned just 3.12% on average.
Valuation
GuruFocus gives Best Buy a full 10 out of 10 ranking for valuation.
That is based on the price-to-GF Value ratio, which sees the share price, $83.02 at the close on Feb.22, divided by the GF Value estimate of its intrinsic value of $113.33.
That makes the stock modestly undervalued and boasting a 36.52% margin of safety.
Its price-earnings ratio is 12.30, which is well below the industry median of 15.98. And its PEG ratio comes in at 0.85, which is slightly less than the fair value mark of 1.
Because Best Buy has a predictability ranking of only one out of five stars, we ignore the discounted cash flow valuations.
Gurus
At the end of 2022, 13F filings show seven gurus had ownership stakes. The T Rowe Price Equity Income Fund (Trades, Portfolio) had 940,000 shares, representing 0.42% of Best Buy’s shares outstanding and 0.45% of the fund’s assets under management.
Jeremy Grantham (Trades, Portfolio) of GMO LLC had 496,088 shares, while Jim Simons (Trades, Portfolio)' Renaissance Technologies had 112,800 shares.
Institutional investors are heavily invested; they own 89.57% of shares outstanding and insiders own 2.3%. Among the insiders, CEO Corie Barry has the largest stake with 316,631 shares as of July 11, 2022.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Conclusion
Thanks to a combination of rising dividend payments and a struggling share price, Best Buy has a dividend yield of more than 4%. And it should be sustainable because it has the earnings and free cash flow power to keep those increases coming.
