Big Lots, It’s Still A Deep Value Dividend Stock
Big Lots (NYSE:BIG
) has long been a favorite of us here at MarketBeat because of its value, dividend, and turnaround story. The turnaround, labeled Operation North Star, got underway long before the pandemic struck and, coincidentally, set the company up for big gains in the post-pandemic world. The company’s growth has accelerated from low-single-digits to solid double-digits with most of the gains expected to stick. With the company slated to report earnings in about a month and price action breaking out it looks like now could be another big opportunity
in deep-value Big Lots.
Big Lots Is An Unbelievable Value
One of the many phenomenon that has arisen in the wake of the pandemic is the spread of value within a single sector. Consumer staples is only one example with leaders trading nearly 30X earnings while the laggards trade closer to 10X theirs. That situation is also true in the consumer retail/bargin shopping industry where the leadership, Costco (NASDAQ:COST), is trading at 35X this years earnings while the laggard, Big Lots, trades at only 7X earnings. Big lots is a different beast than members only Costco but there are other comparisons to be made as well.
Walmart (NYSE:WMT), Costco’s closest competition, is trading about 25X and 24X earnings showing the blend between the member warehouse Sam’s Club and core-business Walmart. Target (NYSE:TGT) helps bring the valuation between Costco and Walmart into a better perspective bracketing Walmart to the downside at 20X and 21X earnings and without a members-only unit. Now, Ollies Bargain (NASDAQ:OLLI) Warehouse is a warehouse close-out operation with similarities to both Big Lots and Costco and it trades at 30X and 32X earnings just like its larger cousin. BJ’s Wholesale Club (NYSE:BJ), another close resemblance to Costco is trading at 14X and 16X earnings. The takeaway, there is no other way to view Big Lots other than as the deep value it is.
Notably, the valuations and consensus estimates for the entire group save Costco and Walmart is calling for revenue and earnings to decline in the coming year. We think that is just plain wrong. The consensus estimate for Big Lots has revenue and earnings falling double-digits from 2020 which does not reflect underlying trends in the consumer market, the push to the suburbs, the latest round of stimulus, and the CBO’s latest read on the economy. The CBO says U.S. economic activity will regain its pre-pandemic levels by mid-year with full labor-market improvement within the next 6 months. That is a robust outlook for economic growth.
Big Lots Pays A Very Safe Dividend, With Growth In The Forecast
Although Big Lots has not increased its distribution in three years the stock first came to our attention during a screen for dividend growers. The company had increased for several years and was set up for more until execs decided on Operation North Star. Since then, the dividend has held steady at $1.20 (about 2.15% yield at today’s prices) while the company shored up the balance sheet and pulled off a national reorganization that focused heavily on eCommerce. Now, two years into the turnaround and a year into the pandemic, the company is growing at a double-digit rate and showing signs of increasing earnings leverage.
The takeaway here is that Big Lots dividend is safe with a payout ratio near 16% and a fortress balance sheet. Not only is there ample free cash flow but cash flow is growing. Big Lots is going to increase its dividend, the only question is when and by how much?
The Technical Outlook: Big Break Out For Big Lots
Shares of Big Lots got stuck in a trading range following the summer 2020 rebound but that scenario is fast-changing. With earning reporting on the horizon, the stock broke out of the range and looks like it could easily advance $15 to $30 dollars from the $55.50 level. That’s a gain of 27% to 35% over the next quarter or two.
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