Back-to-School Investing: 3 Dividend Picks

Back-to-school is an important time of year for many companies. It encompasses one of the highest spending months outside of the major holidays in the United States.

Many quality dividend investing stocks rely heavily on the back-to-school shopping period.

The following three stocks all pay dividends to shareholders and have annual expected returns above 10%, making them 3 of the best dividend stocks for the remainder of 2024.

Back-to-School Investing: 3 Dividend Picks

Target Corporation (TGT)

Target Corporation is a major U.S. discount retailer that benefits greatly from the back-to-school shopping season. Founded in 1902, Target has operations solely in the U.S. market after a failed bid to expand into Canada. Its business consists of about 1,850 stores, which offer general merchandise and groceries and serve as distribution locations for the company’s burgeoning e-commerce business. The firm is our first back-to-school dividend investing equity.

Target has increased its dividend for more than 50 consecutive years, making it a Dividend King.

Target posted first-quarter earnings on May 22nd, 2024. Adjusted earnings-per-share came to $2.03 in Q1, which was three cents in light of estimates. Revenue was also down 3.1% to $24.53 billion, which met estimates. Comparable sales fell 3.7%, which met expectations and caused the consolidated top-line decline. 

Inventory fell 7% year-over-year, which is good news for margins and cash flow. The company also noted that despite the fall in total inventory, in-stock levels were better than last year. Operating margin was 5.3% of revenue, up fractionally from 5.2% a year ago. Gross margins were 27.7% of revenue, up 140 basis points year-over-year. This was attributable to cost improvements, lower promotional markdown rates, and a favorable sales mix. 

Target has grown its earnings-per-share at an average annual rate of about 8% during the last decade. The company has reduced its share count over time, although the past two years have seen essentially no change. Overall, we expect 10% annualized growth from what should be a modest level for 2024.

Target’s competitive advantage comes from its everyday low prices on attractive merchandise in its guest-friendly stores. Its recession performance is much better than that of most retailers. Therefore, while Target is vulnerable to economic downturns, it is much more resilient than most stocks in such periods.

Nike Inc. (NKE)

Nike is the world’s largest athletic footwear, apparel, and equipment maker and stands to benefit greatly from back-to-school shopping. The namesake is one of the most valuable brands in the world. Nike’s offerings focus on six categories: running, basketball, the Jordan brand, football (soccer), training, and sportswear. Nike also owns Converse. It is our second back-to-school dividend investing pick.

In late June, Nike released (6/27/24) results for the fourth quarter of fiscal year 2024. Nike’s fiscal year ends on May 31st. Sales and direct sales decreased -2% and -8%, respectively, vs. the prior year’s quarter. Digital sales declined -10%. Gross margin expanded from 43.6% to 44.7% thanks to price hikes and lower freight costs, and earnings-per-share grew 53%, from $0.66 to $1.01, exceeding the analysts’ consensus by $0.17, but only thanks to depressed earnings in the prior year’s period. Nike provided daunting guidance for fiscal 2025.

Nike recovered strongly from the pandemic in 2021, but it is now facing a double hit from inflation: lower margins and lower consumer demand. Sustained margin improvement may prove hard in the future, but there is still ample room for revenue gains and share buybacks. China is likely to be the backbone of Nike’s growth story, as it posted gains even in 2020 despite the extremely adverse business environment. 

Moreover, Nike’s relatively recent direct-to-consumer push is probably a significant growth driver thanks to consumers’ shift towards online shopping. Nike’s competitive advantage stems from its exceptional brand name and image around the world. In addition, the company has developed hard-to-replicate distribution capabilities.

Nike raised its dividend by 9% last year. It has grown its dividend for the last 22 years, with an average annual growth rate of 12.3% during the previous decade. It is on the Dividend Contender list. We expect an 11% average yearly earnings-per-share growth over the next five years. Total returns are expected to be above 16% per year over the next five years.

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Kohl’s Corp. (KSS)

Wisconsin-based retailer Kohl’s traces its roots back to a single store: Kohl’s Department Store in 1962. Since then, it has grown into a leader in the space – offering women’s, men’s, and children’s apparel, housewares, accessories, and footwear in more than 1,100 stores in 49 states. The company should generate more than $16 billion in sales this year. Kohl’s our third back-to-school stock for dividend investing.

The company sells many brands, but most of its apparel offerings are private label, developed in-house to drive better margins. The firm also has numerous partnerships with celebrities and other brands. More recently, Kohl’s has started a collaboration with beauty brand Sephora, and Kohl’s is on its way to having a Sephora shop-in-shop in each of its stores.

Kohl’s reported first-quarter earnings on May 30th, 2024. The firm posted a loss of 24 cents per share, well below the forecasted profit of six cents per share. Revenue was also off more than 5% year-over-year to $3.38 billion, marginally ahead of estimates. Comparable sales were down 4.4% year-over-year, and operating income fell by more than half as margins struggled once again. 

The company noted that comparable sales were adversely impacted by more than 600 basis points compared to the year-ago period due to a lack of clearance sales. Management said regular price sales were up, but Sephora continues to be a source of strength. 

Kohl’s now expects full-year revenue to be down between 2% and 4%, with comparable sales declining 1% to 3%. Operating margin is expected to range from 3.0% to 3.5% of revenue.

One key growth initiative for Kohl’s is the partnership with Sephora, which drives customers to stores and boosts traffic. Kohl’s anticipates Sephora sales to reach $2 billion by 2025, with comparable sales growth above 25% per year.

The firm believes it can achieve $2 billion in annual revenue with Sephora, which it says is “highly accretive” to profit margins. In our view, this is Kohl’s best chance to achieve meaningful earnings growth in the years to come.

Kohl’s stock currently pays an annualized dividend of $2.00 per share, which equates to a current dividend yield of 10% at recent share prices. Over the next five years, total returns are expected to be above 11% per year for KSS stock.

Disclosure: No positions in any stocks mentioned

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