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Should Investors Consider Macy’s for Its Dividend Yield?

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Based on its closing price of $15.48 on November 27, Macy’s (M) stock has an attractive dividend yield of 9.8%. However, investors should bear in mind that its yield is high due to its stock price being down significantly year-to-date.

Macy’s stock has taken a beating this year and fallen 48.0%. The company’s persistently sluggish sales and substantial earnings decline have dragged down its stock. The stock is trading about 10% above its 52-week low of $14.11 and 56% below its 52-week high of $35.06.

Similarly, peer stocks have also fallen and boosted their dividend yields. For instance, Kohl’s (KSS) and Nordstrom (JWN) stocks have fallen 27.2% and 17.8%, respectively, this year. They offer dividend yields of 5.6% and 3.9%.

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Should investors avoid Macy’s stock despite its dividend yield?

Macy’s stock looks unattractive, despite its high dividend yield. Sales and margin headwinds are likely to persist in future quarters, hurting the company’s financials and cash flow. We think its stock will remain pressured.

Department stores are facing tough competition, which is taking a toll on their top line. Promotions and business reinvestment needs are dragging their sales and earnings lower.

Macy’s recent financial performance

Macy’s financial performance in its most recent quarter failed to impress. Anticipating continued weakness, management lowered its full-year sales and earnings outlook, discouraging investors.

In the third quarter, Macy’s revenue stayed low and fell 4.3% YoY (year-over-year) to $5.2 billion, missing analysts’ estimate. A 3.5% decline in same-store sales (owned plus licensed) hurt its revenue.

Macy’s adjusted EPS plunged 74.1% YoY to $0.07 but came ahead of Wall Street’s forecast. The company blamed unfavorable weather, lower tourist spending, and e-commerce tech issues for its dismal show. Macy’s now expects net sales to decline by 2.0%–2.5% this year, whereas it had previously forecast flat net sales. It now foresees its 2019 same-store sales (owned plus licensed) falling 1%–1.5%, down from its earlier guidance of flat-to-1.0% growth. The company has reduced its 2019 adjusted EPS forecast to $2.57–$2.77 from $2.85–$3.05.

We think the US dollar strengthening could affect tourist spending, and in turn, Macy’s top-line growth. Increased competition and promotions could continue to drag it down. Wall Street’s target price of $15.43 for Macy’s stock aligns with its November 27 price, implying no upside for the stock.

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