Best Buy: Your future self can thank you for shopping today (NYSE:BBY)

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scott olson

Retail stocks often don’t come to mind when it comes to high-dividend earners. That’s because this segment is plagued by competition with little differentiation between companies. Even the most successful retailers are constantly under pressure to keep prices low. and fend off new competition.

But there are some companies that have been able to steadily increase their dividends while dealing with the challenges of the retail sector. These businesses have proven that they resonate with consumers and can generate healthy profits. This takes me to Best Buy (New York Stock Exchange:BBY), which has been one of the stocks with the highest dividend growth in the retail sector. This article highlights why BBY is currently a buy while being relatively cheap, so let’s get started.

Why BBY?

Best Buy is the largest upscale consumer electronics retailer in the United States. He is also considered by many to be the “last man standing”, after other pure electronics stores closed, including Circuit City and, more recently, regional players such as Fry’s Electronics.

Perhaps counterintuitively, I find it much better to invest in dominant players in a slow-growing industry than to buy in fast-growing industries. This is because slow-growing industries attract much less competition, and therefore you don’t need to hire MBA-level strategists to try to outsmart the competition. This is reminiscent of Peter Lynch, who commented that he preferred industries that don’t attract many MBAs.

Suffice it to say that physical retail is a slow-growing industry and it would be safe to assume that there is no one trying to open a national chain of electronics retailers to try and put Best Buy out of business.

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However, BBY has not been immune to macroeconomic weakness, coupled with a difficult year comparable to last year, when many consumers were working and spending more time at home, causing sales of consumer electronics to rise. This is reflected in a 12% decline in comparable sales in the second quarter of FY23 (ended July 31), compared to 19.6% growth in the prior year period.

While the business is likely to be challenged in the short term, I think the long-term thesis is intact. This is reflected in the fact that BBY has successfully transitioned to an omnichannel model, which is proving to be valuable leading tech brands like Apple (AAPL) renting out valuable space in BBY stores to showcase their newest products. This type of experience is something an online-only business model simply cannot touch.

Now, more than a third of BBY sales are through digital channels, and overnight delivery now covers virtually every American household (99%). Additionally, BBY’s “buy online, pick up in store” option further drives foot traffic and sales at its retail stores, and is something online-only competitors can’t replicate.

BBY is also transitioning further into services, as its Totaltech program now has more than 4.5 million members who receive unlimited in-home tech support, members-only pricing, and free extended warranties on purchases. If anything, the pandemic since 2020 has given this segment of BBY’s business a strong boost that it should be able to sustain and carry forward. Management highlighted the long-term strategic benefits of this program during the recent conference call:

As we have shared before, from a financial perspective, Totaltech is a short-term investment to generate long-term benefits. Over time, we expect that the incremental spend we get from members will lead to higher dollar operating income. As I just mentioned, there are several things we’re seeing with the program that give us confidence that clients value membership and that our overall thesis is developing.

At the same time, consumer electronics is a low-frequency category. And we’re in a unique macro environment, which means it’s going to take time for us to really assess performance. Unsurprisingly, we will continue to monitor the program and iterate on the offering as we learn more.

Meanwhile, BBY maintains a strong balance sheet with a BBB+ rating and has been active in returning capital to shareholders. As shown below, BBY has bought back 23% of its outstanding shares in the last 5 years alone.

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ABY Shares Outstanding (Seeking Alpha)

Plus, it currently yields a respectable 5.3%. The dividend is well protected by a 42% payout ratio and comes with a high 5-year dividend CAGR of 21%, including a 26% increase this year. ABY is attractively priced at $67 with an early PE of 10.7, down from its normal PE of 13.7.

Analysts expect the current fiscal year to be a low point for earnings, projecting annual EPS growth of 11-18% over the next 2 years. S&P Capital IQ has an average price target of $81, implying potential double-digit annual total returns over the next two years.

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ABY Rating (FAST Graphics)

Investor Takeaway

Best Buy is a dominant player in a slow-growing industry that is attractively priced after liquidation. While the BBY has been challenged by macroeconomic weakness and a difficult comparable, I think the long-term thesis is intact. It is a company with a strong balance sheet, an omnichannel business model, and exposure to high-growth categories such as services and home office/learning. For these reasons, I think Best Buy is a compelling value proposition at current levels before the market wakes up on this action.

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