Dick’s Sporting Goods is a Winner for Income Investors

Key Points

• Dick's Sporting Goods had another solid quarter with growth, margin strength, and capital returns.
• The stock is cheap at 15 times earnings, paying more than 2% in yield and aggressively reducing the share count.
• A price-multiple expansion could add another $100 or 50% to this stock within the next few quarters. 

Dick’s Sporting Goods NYSE: DKS has everything an income investor could want, including business growth, outperformance, improving guidance, solid cash flows, a fortress balance sheet, and robust capital return. The latest results testify to that fact and point the market to new highs. The question now is if Dick’s will hit the new high sooner or later, and the odds favor sooner. The market is up more than 5% in premarket trading, indicating a trend-following signal that could take this market to the high end of the analysts’ range before the end of the year. That’s a 25% upside from current levels. 

Dick’s Scores Another Win for Investors in Q1

Dick’s Sporting Goods Q1 results highlight the business's value for consumers and its place in the retail spectrum. While concerns about consumer health persist, Dick’s results show them spending on sporting goods, and Dick’s is the place to go. The Q1 revenue came in at $3.02 billion, up 6.2% compared to last year on strength in comparable sales and store count growth. 

The revenue also outpaced the consensus estimate reported by MarketBeat by 270 basis points, leading management to issue favorable guidance. Comp sales are up 5.3% on strength in transactions and ticket average, accelerating 170 basis points from the previous year as the company gains share from competitors like Target NYSE: TGT. 

The margin is also good. The company reported an 11.3% EBIT margin, near record highs, and strength in all metrics. The only bad news is that taxes increased by quadruple digits, leading to a year-over-year (YoY) decline in adjusted earnings, but mitigating factors exist. Earnings are down YoY but only slightly, adjusted EPS outpaced the consensus by $0.33 or more than 1,000 basis points, and the cash flow/free cash flow situation is robust. 

The balance sheet highlights include a flat cash and debt situation with low debt levels in all comparisons. Total debt is less than 2.5 times cash, 1.5 times equity, and 0.4 times assets, leaving the company in a nimble financial position. The cash balance is solid at $1.65 billion, inventories are flush, and assets are rising.

Dick’s Capital Returns are Why You Own This Stock

Dick’s business is solid and allows for robust capital return. The return includes dividends and share repurchases, which drive considerable value. The repurchases and distribution plan allow for aggressive distribution increases because the share count is falling rapidly. The per share distribution is up 10%, about 2.25% in yield, compared to last year, but total dividends paid fell, paving the way for another year of aggressive increase at year-end. Repurchases reduced the diluted share count by an average of 7% YoY in Q1 and are expected to continue this year. 

Twenty-two Analysts are on board with Dick’s Sporting Goods, pegging it at a consensus Moderate Buy and leading the market higher with price target revisions. The post-release pop has the market at consensus, but most recent targets have the stock near the range's high end of $60. The question is whether they will stand firm with their sentiment or continue the trend; either way, this stock is set to hit a new all-time high. 

Dick’s Sporting Goods Trends Higher: New Highs are in Sight

Dick’s Sporting Goods has been trending higher since 2020 when it had a game-changing event: social distancing. Social distancing reinvigorated the US sporting world and eCommerce, where Dick’s was already established. The combination put Dick’s in a new league that it continues to dominate. Based on the chart, the stock price could gain a new high and advance another 50% or $100 on price-multiple expansion. Trading at 14.7 times is a value that can be compared to the other leading retailers, Walmart NYSE: WMT and TJX Companies NYSE: TJX.