Wednesday, April 1, 2015

Recent Buy: Gap Inc.

This article originally appeared on The DIV-Net on 1 April 2015.

Mar 16, 2015: Bought 60 shares of GPS at $41.42 per share.

Gap Inc. (NYSE:GPS) is a global apparel retail company that offers apparel, accessories, and personal care products under the Gap, Banana Republic, and Old Navy brands, among others. The company operates in the specialty, outlet, online, and franchise channels. It has 375 franchise stores in 41 countries. GPS was founded in 1969, and is headquartered in San Francisco, California.

GPS is the Consumer Discretionary sector winner and top ranked stock in the March 2015 edition of my 10 Dividend Growth Stocks article series. The company has an 11-year streak of consecutive dividend increases. It pays quarterly dividends of 23¢ per share in the months of January, April, July and October.

The share price of GPS has just about doubled over the past 10 years, outperforming the S&P 500 by nearly 25% in the process. For the past two years, GPS has traded in a channel between $35.50 and $46.50:

Source: Scottrade

At my buy price of $41.42, GPS yields 2.22%:



I prefer to buy stocks yielding at least 2.5%, but GPS compensates with an attractive and growing dividend growth rate:
1 Year3 Year5 Year10 Year
37.6%20.5%17.2%20.5%


In fact, an investment in GPS ten years ago would have delivered total returns in excess of your initial investment and yield on cost would now be 13.55%!

Source: GuruFocus

Analysis of GPS


My fair value estimate of GPS is $45.05, so I bought shares at a discount of nearly 9%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.

 

GPS passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (11 years)
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (22.63%)
  • Earnings per share (EPS) percentage payout is less than 40% (32.86%)
  • Debt to equity ratio is below 50% (48%)
  • Price to earnings ratio (P/E) is less than 20 (TTM 14.69x and Forward 13.18x)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (1.43)
  • 5-year CAGR is at least 10% (20.39%)
  • Reasonable confidence in continued dividend growth (Yes)
  • Price discount is at least 5% of fair value estimate (8.76%)
GPS fails the following of my selection criteria:
  • Dividend yield exceeds 2.75% (2.22%)
Based on these statistics, GPS earns 7 out of a possible 7 stars: (*******)

The following chart shows GPS' dividend payments and EPS over the last 5 years. Earnings growth is solid and it is evident that the company's growing dividend is sufficiently covered:


Other ratings for GPS


 Zacks 3-Hold
 S&P Capital IQ's Stock Report (****-) Buy
 Thomson Reuters StockReport+  (9/10) Positive  
 MorningStar Rating (****-)
 The Motley Fool's CAPS Rating  (***--)
 TheStreet Ratings Buy [A-]

Concluding Remarks


GPS reported fiscal year 2014 results on 26 February 2015. The company's EPS increased 5% to $2.87 per share, up from $2.74 per share in 2013. Net sales increased 2% to $16.44 billion, up from $16.15 billion in 2013. Old Navy, the company's largest global brand, delivered positive comparable sales results (5%). The Gap and Banana Republic global brands fared worse, with Gap dipping 5% and Banana Republic ending flat. Total online sales increased 10.6% from $2.26 billion in 2013 to $2.50 billion in 2014.

The company's 2015 outlook is somewhat disappointing, with a fiscal 2015 for EPS of $2.75 to $2.80 per share. Currency headwinds and delayed merchandise receipts due to a labor dispute at West Coast ports are the main reasons for lower expectations.

Despite the disappointing outlook and some recent poor sales results, I like GPS as a longterm dividend growth investment. In February, the company announced that its board of directors approved a new $1 billion share repurchase authorization along with plans to increase the annual dividend to 92¢ per share in fiscal year 2015. This reinforces the company's commitment to returning excess cash to shareholders.

GPS has a strong balance sheet and a good track record of maintaining disciplined capital management strategies. The company is continuing to increase its international presences by expanding into emerging markets, including China, Russia, South Africa and some Latin American countries. One way GPS is increasing its reach is through franchise businesses. Since 2006, about 400 franchise-operated stores have opened in 50 countries, with 35 new stores being planned for 2015.

GPS is continuing to enhance its eCommerce capabilities, expanding so-called omni-channel features to all its stores and partnering with the leading European fashion eCommerce site, Zalando. The most recent year over year increase in online sales is indicative of the success of the strategy.

In January, the company announced leadership changes to improve and intensify customer focus of its Gap brand. In fact, the changes being made by new CEO are impressing some analysts, including ones at UBS and at Stifel. Both have reiterated buy ratings on GPS with a target price of $48.

60 shares of GPS adds $55.20 to DivGro's projected annual dividend income. I'll update my portfolio soon to reflect this recent purchase.

5 comments :

  1. DivGro, I checked out the article on DivNet, very good analysis, thank you. With a yield of 2.1%, GPS is not in my sights, but I am adding it my watch list due to the divided growth rate ---which you point out--- is great.

    Fastgraphs shows GPS at the top of fair market value (depending upon your time frame--I use 7 & 9 years), so I would like to see it hit $36-$37 before I think about stepping in. That would bring the yield up to 2.6%. The lowest yielders in my portfolio are TGT (2.5%, although I bought at 3.7%) and BAX (3%).

    I am most interested in income, with some growth at the moment, rather than growth with some income, if that makes sense. I will be buying something tomorrow--PM, EMR, & T are the likely suspects at the moment.

    Good luck with GPS and I will be watching it.

    ReplyDelete
    Replies
    1. I got at a slightly better initial yield of 2.22%, but your point is well taken -- I usually look for at least 2.5%. In this case, I feel that GPS's dividend growth rate, if retained, will quickly increase my yield on cost to above 2.5%.

      $36-$37 would be great! If that happens, I'll buy more shares! :-)

      Totally makes sense that you're looking mostly at income. Some years from now (maybe 7-10), I'll probably have to start relying on income from my portfolios, too. Meanwhile, I want a good mix of higher yielders with modest growth rates, and lower yielders with aggressive growth rates.

      Thanks for commenting and good luck!

      Delete
  2. May I ask your age? Doesn't have to be specific, range is OK. I like to know the age of the bloggers I follow because I think it helps somewhat to understand the tactics within the strategy.

    ReplyDelete
    Replies
    1. I've been around for 19,551 sunrises :-)

      Delete
  3. Got it! Thank you for that.

    ReplyDelete

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