Four Dividend-Payers To Buy Before They Report Earnings

It’s A Big Week For Retail

The earnings picture for the retailers this quarter, in general, is far from pretty. The average S&P 500 company is producing negative EPS growth in the range of -14% and many retailers are faring much worse. In terms of spending type, discretionary and staples, the staples company are among the worst hit of any S&P sector and expected to see EPS shrink more than 50% for the quarter.

The good news is there are pockets of strength within the industry. Last week’s Retail Sales data was dismal but showed a few categories where spending was not only stable but rising. Two of note are home-improvement/outdoor/garden-centers and eCommerce (aside from obvious strength in grocery/consumer staples). Garden-centers and home-improvement stores saw a small single-digit MOM decrease offset buy a small single-digit YOY increase in revenue. The eCommerce segment saw a high single-digit MOM increase that boosted YOY gains into the teens.

While the earnings season is largely behind us the bulk of the retailers have yet to report. Names like Kohls (KSS), Haverty (HVT), Cato (CATO), L Brands (LB), and Urban Outfitters (URBN) will be releasing reports alongside Walmart (WMT), Target (TGT), Home Depot (HD), and Lowe’s (LOW). While I would advise investing in this sector with care, especially with the first group of names, the second list presents a much different proposition. Where most retailers have been severely impacted by the COVID-19 crisis these four, among others, have been doing fine if not thriving.

What These Stocks All Have In Common

Walmart and Target, both well-known retailers of consumer staple items, have both been pushing hard into the eCommerce space. Target reported what it called “sizzling sales” at the beginning of May. The company says comps are up 7% with strength seen in the digital channels. Digital sales are up 100% from last year with demand for same-day pickup. Home Depot and Lowes are also doing well with their digital channels to include delivery and curbside pickup.

Walmart, Home Depot, Lowes, and Target have many similarities that make them attractive buys today. The one overarching feature that links them together is blue-chip dividend-paying stability. Home Depot is the youngest of the lot and it has been in business for over 40 years. Along with their longevity is an ability to pay, and to grow, their dividend payments year after year consecutively and without fail. Again, Home Depot is low-man on the totem pole with only 11 years of consistent to-date dividend increases but the group as a whole shares Dividend King status.

While Home Depot only has 11 years of regular to-date dividend increases a look back over the company’s history tells a different story. Home Depot has been paying dividends almost since its founding and only ever increased the payment. Walmart is next up in terms of dividend-history and it is just shy of the 50-year mark. Target and Lowe’s are both full-fledged Dividend Kings. My point here is that pandemically-supported Dividend Kings have been among the best-performing assets in the post-correction world. I expect that trend will continue.

What To Expect When The Reports Come In

Walmart, Target, Home Depot, and Lowes report Q1 earnings over the next two days. Walmart and Home Depot both report on Tuesday before the bell while the other two report the following day, also before the bell. All four are expected to report increases in revenue with a high-probability of surpassing the analyst’s expectations. Walmart and Home Depot should see revenue growth in the range of 6% to 7% while Home Depot and Lowes a more modest 3% to 4.5%

The bottom line results and the guidance are what the market is going to be focused on. Bottom-line results are expected to fall due to increased costs related to the pandemic. Target is projected to post the worst decline in EPS, about 75%, but like with the others, the outlook for earrings expansion during the rebound and recovery is robust. Lowes has the best outlook for EPS growth, just shy of 10%, with momentum expected to build as the year progresses.

The Technical Outlook: Bullish But I Like Lowes and Target Best

The technical outlook for all four of these stocks is bullish but, of Home Depot or Lowe’s, I like the chart of Lowes best. It may be because Lowe’s is a slightly less-well-known stock than HD (at least in the eyes of the media) or because it has a lower dividend, but the stock is lagging and set up to make a nice pop.

In terms of the dividend, Lowes pays only 1.95% at today’s prices where Home Depot pays 2.5% but there are mitigating factors. Aside from Lowe’s official Dividend King status, there is the payout ratio, 37% compared to 70%, and the outlook for growth. Both Lowe’s and Home Depot are on track to grow in 2021 but only Lowe’s will grow this quarter

Between Walmart and Target, Target appears to be the better buy for yield and the potential for capital gains. Like Lowe’s, Target is lagging its competitor and set up for comparable results this quarter and this year.