Tag: Dividends

Gap shares pop as company’s holiday earnings blow past estimates, Old Navy returns to growth

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A general view of an Old Navy store. 

Gap Inc.

Gap’s largest banner Old Navy returned to growth for the first time in more than a year during its holiday quarter as the retailer delivered earnings on Thursday that came in well ahead of Wall Street’s expectations. 

Sales at Old Navy grew 6% to $2.29 billion, and Gap’s overall gross margin surged 5.3 percentage points to 38.9% thanks to fewer markdowns and lower input costs. Analysts had expected a gross margin of 36%, according to StreetAccount. 

Shares of Gap jumped about 5% in extended trading following the report.

Here’s how the retailer did in its fourth fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

  • Earnings per share: 49 cents vs. 23 cents expected
  • Revenue: $4.3 billion vs. $4.22 billion expected

The company’s reported net income for the three-month period that ended February 3 was $185 million, or 49 cents per share, compared with a loss of $273 million, or 75 cents per share, a year earlier.

Sales rose slightly to $4.3 billion, up about 1% from $4.24 billion a year earlier. Like other retailers, Gap benefited from a 53rd week during fiscal 2023 and without it, sales would’ve been down during the quarter. The extra week contributed about four percentage points of growth during the fiscal fourth quarter, the company said. 

Comparable sales during the quarter were flat, compared to estimates of down 1.1%, according to StreetAccount. In-store sales were up 4% while online sales decreased 2% and represented 40% of total revenue. 

The retailer decreased inventory by 16% during fiscal year 2023, and with those levels now in check, Gap is working to hold the line on promotions and drive full price selling.

During the quarter, Gap saw higher average selling prices across all of its brands, and it expects to grow its gross margin by at least a half percentage point in fiscal 2024.

“We were the authorities of taking on-trend basics, expressing it in ways that drove cultural conversations. At its best, we were a pop culture brand that did much more than sell clothes and as you know, we all know, we lost our edge. We devolved from a pop culture brand to a clothing retailer, and today we’re moving again,” CEO Richard Dickson told CNBC in an interview.

“We’re getting our vibe back.”

Staging a turnaround

Headed into the holiday season, Gap struck a cautious tone with its outlook as it warned of an “uncertain consumer environment,” and on Thursday, it reiterated those concerns. 

In the current quarter, it expects sales to be roughly flat, compared to estimates of down 0.2%, according to LSEG. For the full year, it expects sales to also be roughly flat, on a 52-week basis, compared to estimates of up 0.5%, according to LSEG. 

“I think we have to look at 2023 where we did see a lot of volatility and uncertainty in the environment. We have inflation, student loan payments, high interest rates, we had dwindling consumer savings. Now fortunately, despite many predictions to the contrary, we didn’t see a recession in the year but our industry was definitely affected,” said Dickson.

“While the apparel market is currently expected to decline in 2024, there are always winners in every market, and we’re seeing the consumer react to newness,” he said. “We’re seeing innovative marketing drive traffic, and it’s inspiring us to believe that we are on the right track with our reinvigoration playbook.”

It’s been a little over six months since Dickson, the former Mattel boss credited with re-igniting the Barbie brand, took over as Gap’s chief executive, and in that time, he’s focused on breathing relevancy back into the retailer’s legacy brands and getting them back to growth. 

Last month, Gap announced it had tapped fashion designer Zac Posen to be its creative director and Old Navy’s chief creative officer. Given its size and contributions to revenue, Gap cannot succeed if Old Navy isn’t winning, and for more than a year, sales have been down even at a time when consumers are hungry for bargains and affordable options. 

Posen, who got his start designing couture gowns and specializes in women’s dresses, is a key hire to Dickson’s executive team. He helps fill in the gaps when it comes to design and apparel, which are areas where Dickson lacks expertise as he’s spent the majority of his career at a toy company. He’ll also play a key role in reigniting cultural relevance across Gap, said Dickson.

“His creative expertise, and his clarity on culture, you know, they’ve consistently evolved American fashion, making him a great fit for the company as we look to energize our culture of creativity and we look to reinvigorate these storied brands,” said Dickson. “His role as chief creative officer at Old Navy is really to harmonize, orchestrate and dial up the storytelling across product and marketing.”

Prior to Posen’s appointment, Dickson hired Eric Chan, the former CFO of the LA Clippers, to be Gap’s chief business and strategy officer. He also hired his former colleague Amy Thompson, Mattel’s former chief people officer, to take on the same role at Gap. 

Banana and Athleta lag

On the back end, Gap has made improvements in growing its gross margin and streamlining its cost structure, but it’s been grappling with a steep decline in sales across its four brands: its eponymous banner, Old Navy, Athleta and Banana Republic. 

Gap and Old Navy have seen some signs of progress but Athleta and Banana Republic have been dragging on the overall business. 

When it comes to Banana, Dickson told CNBC he is “encouraged by the brand’s aesthetic direction” but said it’s going to take time to build back its momentum.

“We gotta get really strong in fixing the fundamentals and strengthening these fundamentals in order to drive more consistent results,” said Dickson. “And that’s what we’re really going to be focused on, our day to day execution, building upon the insights that we’re learning.”

Athleta is still in a state of recovery after numerous leadership shifts and a number of missteps when it came to designing the right type of product in the right styles and colors. It’s also missed the mark in its stores and its marketing, said Dickson.

In August, Athleta named former Alo Yoga President Chris Blakeslee its next CEO, and Dickson said the brand has made strides since he’s come aboard.

“We started the year with a much cleaner palette and we’ve seen early successes in these new arrivals at full price and we’re getting encouraged by the consumer’s reaction,” said Dickson. “I really like where the team is going. We’ve got a new drop strategy, which they’ve been testing, there’s new innovation, color has started to enter the stores and reacted really well.”

Here’s a closer look at each brand’s performance during the fourth quarter:

  • Old Navy: Sales were up 6% to $2.29 billion while comparable sales were up 2%, ahead of estimates of up 1%, according to StreetAccount. 
  • Gap: Sales were down 5% to $1.01 billion, weighed down by selling the brand’s China business, while comparable sales were up 4%, well ahead of estimates of down 1.3%, according to StreetAccount. The brand saw strength in the women’s category. 
  • Banana Republic: Sales were down 2% to $567 million were down 2% while comparable sales were down 4%, better than the 6.7% decline analysts had expected, according to StreetAccount. The company noted that Banana has made progress in “elevating its aesthetic” but re-establishing the brand “will take time and there is work to be done to better execute many of the fundamentals.” 
  • Athleta: Sales were down 4% to $419 million while comparable sales were down a steep 10%. Gap noted that Athleta’s performance improved compared to the prior quarter, but said sales are sluggish as the brand looks to hold the line on pricing and lap a prior period of elevated markdowns. 

Correction: This story has been updated to correct the spelling of fashion designer Zac Posen’s name.

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Best Buy warns of layoffs as it issues soft full-year guidance

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People walk past a Best Buy store in Manhattan, New York City, November 22, 2021.

Andrew Kelly | Reuters

Best Buy surpassed Wall Street’s revenue and earnings expectations for the holiday quarter on Thursday, even as the company navigated through a period of tepid consumer electronics demand.

But the retailer warned of another year of softer sales and said it would lay off workers and cut other costs across the business. CEO Corie Barry offered few specifics, but said the company has to make sure its workforce and stores match customers’ changing shopping habits. Cuts will free up capital to invest back into the business and in newer areas, such as artificial intelligence, she added.

“This is giving us some of that space to be able to reinvest into our future and make sure we feel like we are really well positioned for the industry to start to rebound,” she said on a call with reporters.

For this fiscal year, Best Buy anticipates revenue will range from $41.3 billion to $42.6 billion. That would mark a drop from the most recently ended fiscal year, when full-year revenue totaled $43.45 billion. It said comparable sales will range from flat to a 3% decline.

The retailer plans to close 10 to 15 stores this year after shuttering 24 in the past fiscal year.

One challenge that will affect sales in the year ahead: it is a week shorter. Best Buy said the extra week in the past fiscal year lifted revenue by about $735 million and boosted diluted earnings per share by about 30 cents.

Shares of Best Buy closed more than 1% higher Thursday after briefly touching a 52-week high of $86.11 earlier in the session.

Here’s what the consumer electronics retailer reported for its fiscal fourth quarter of 2024 compared with what Wall Street was expecting, based on a survey of analysts by LSEG, formerly known as Refinitiv:

  • Earnings per share: $2.72, adjusted vs. $2.52 expected
  • Revenue: $14.65 billion vs. $14.56 billion expected

A dip in demand, but a better-than-feared holiday

Best Buy has dealt with slower demand in part due to the strength of its sales during the pandemic. Like home improvement companies, Best Buy saw outsized spending as shoppers were stuck at home. Plus, many items that the retailer sells like laptops, refrigerators and home theater systems tend to be pricier and less frequent purchases.

The retailer has cited other challenges, too: Shoppers have been choosier about making big purchases while dealing with inflation-driven higher prices of food and more. Plus, they’ve returned to splitting their dollars between services and goods after pandemic years of little activity.

Even so, Best Buy put up a holiday quarter that was better than feared. In the three-month period that ended Feb. 3, the company’s net income fell by 7% to $460 million, or $2.12 per share, from $495 million, or $2.23 per share in the year-ago period. Revenue dropped from $14.74 billion a year earlier.

Comparable sales, a metric that includes sales online and at stores open at least 14 months, declined 4.8% during the quarter as shoppers bought fewer appliances, mobile phones, tablets and home theater setups than the year-ago period. Gaming, on the other hand, was a strong sales category in the holiday quarter.

In the U.S., Best Buy’s comparable sales dropped 5.1% and its online sales decreased by 4.8%.

During the quarter, traditional holiday shopping days were Best Buy’s strongest, CFO Matt Bilunas said on the company’s earnings call. Comparable sales were down 5% year over year in November but fell just 2% in December around the gift-giving holidays. January was the weakest month during the quarter with comparable sales down 12%, he said.

Barry said customers “were very deal-focused through the holiday season.” Sales on days known for deep discounts like Black Friday and the week of Cyber Monday matched expectations, but the December sales lull was worse than expected.

Demand was stronger than the company anticipated in the four days before Christmas.

Signs of ‘stabilization’

On the earnings call, Barry said Best Buy expects the coming year to be one “of increasing industry sales stabilization.”

She said the company is “focused on sharpening our customer experiences and industry positioning,” along with driving up its operating income rate. That metric is expected to improve in the coming year.

Strength in services revenue, which includes fees from its annual membership program, in-home installation and repairs, has helped to offset weaker demand for new items. It’s a growth area that the company expects will persist in the coming year.

Some gains in its service business came from a switch to My Best Buy, a three-tiered membership program that ranges in price from free to $179.99 per year depending on the perks and benefits.

The company removed home installations as a perk of that program, which Barry said on a call with reporters resulted in more people choosing to pay for that service.

As of the end of the fiscal year, My Best Buy had 7 million paid members. She said customers who belong to the program spent more at Best Buy than those who don’t.

Barry said Best Buy’s services will help the retailer stand out, especially as customers seek guidance as artificial intelligence becomes part of more devices.

The retailer has been waiting for customers to upgrade and replace their consumer electronics after the pandemic-induced wave. There are some signs that cycle has begun, Barry said on the earnings call. For example, she said, year-over-year comparable sales for laptops turned positive in the fiscal fourth quarter and have remained positive in the first quarter.

She cited other positive indicators, too, including cooling inflation and “green shoots” in the housing market. Sales at Best Buy are not directly correlated to the housing market, which has seen slower turnover, but home purchases do tend to spur appliance and TV purchases, she said.

Best Buy paid dividends of $198 million and spent $70 million on share buybacks during the period. On Thursday, the company said its board of directors had approved a 2% increase in the regular quarterly dividend to 94 cents per share, which will be paid in April.

As of Thursday’s close, Best Buy’s stock is up roughly 3% so far this year. The company has underperformed the approximately 7% gains of the S&P 500 during that period. Best Buy has a market value of about $17.4 billion.

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2 out of 5 industrial stocks are at record highs. Here’s our post-earnings outlook on all of them

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Eaton Corporation signage at the NYSE

Source: NYSE

Earnings season was not perfect for our industrial-focused portfolio companies, but we’re feeling pretty good about their prospects for the rest of the year.

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Nike sinks 12% after it slashes sales outlook, unveils $2 billion in cost cuts

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Nike on Thursday unveiled plans to cut costs by about $2 billion over the next three years as it lowered its sales outlook.

The stock fell about 12% in premarket trading Friday. Nike shares were up 4.7% so far this year through Thursday’s close, lagging far behind the S&P 500’s gains for the year. Retailer Foot Locker, which has leaned heavily on Nike products, fell about 8% in extended trading.

Nike now expects full-year reported revenue to grow approximately 1%, compared to a prior outlook of up mid-single digits. In the current quarter, which includes the second half of the holiday shopping season, Nike expects reported revenue to be slightly negative as it laps tough prior year comparisons, and sales to be up low single digits in the fourth quarter.

“Last quarter as I provided guidance, I highlighted a number of risks in our operating environment, including the effects of a stronger U.S. dollar on foreign currency translation, consumer demand over the holiday season and our second half wholesale order books. Looking forward, the impact of these risks is becoming clearer,” finance chief Matthew Friend said on a call with analysts.

“This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA. Adjusted digital growth plans are based on recent digital traffic softness and higher marketplace promotions, life cycle management of key product franchises and a stronger U.S. dollar that has negatively impacted second-half reported revenue versus 90 days ago.”

The company still expects gross margins to expand between 1.4 and 1.6 percentage points. Excluding restructuring charges, it expects to deliver on its full-year earnings outlook.

As part of its plan to cut costs, Nike said it’s looking to simplify its product assortment, increase automation and its use of technology, streamline the overall organization by reducing management layers and leverage its scale “to drive greater efficiency.”

It plans to reinvest the savings it gets from those initiatives into fueling future growth, accelerating innovation and driving long-term profitability.

“As we look ahead to a softer second-half revenue outlook, we remain focused on strong gross margin execution and disciplined cost management,” Friend said in a press release.

The plan will cost the company between $400 million and $450 million in pretax restructuring charges that will largely come to fruition in Nike’s current quarter. Those costs are mostly related to employee severance costs, Nike said.

Earlier this month, The Oregonian reported that Nike had been quietly laying off employees over the past several weeks and had signaled that it was planning for a broader restructuring. A series of divisions saw cuts, including recruitment, sourcing, brand, engineering, human resources and innovation, the outlet reported.

The company didn’t immediately respond to CNBC’s request for comment on The Oregonian’s report.

During Nike’s fiscal second quarter, it posted a strong earnings beat, indicating its cost-savings initiatives were already underway. But, for the second quarter in a row, it fell short of sales estimates, which is the first time Nike has seen consecutive quarters of revenue misses since 2016.

Here’s how the sneaker giant performed compared to what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

  • Earnings per share: $1.03 vs. 85 cents expected
  • Revenue: $13.39 billion vs. $13.43 billion expected

The company reported net income for the three-month period that ended Nov. 30 was $1.58 billion, or $1.03 per share, compared to $1.33 billion, or 85 cents per share, a year earlier.

Sales rose about 1% to $13.39 billion, from $13.32 billion a year earlier.

Nike is considered a leader among industry peers such as Lululemon, Adidas and Under Armour, but its profits have been under pressure and it has been in the middle of a strategy shift that has seen it rekindle its relationships with wholesalers including Macy’s and Designer Brands, the parent company of DSW.

Focus on margins

For the past six quarters, Nike’s gross margin has declined compared to the prior-year period, but the story turned around on Thursday. Nike’s gross margin increased 1.7 percentage points to 44.6%, slightly ahead of estimates, according to StreetAccount.

This time last year, Nike’s inventories were up a staggering 43% and the retailer was in the middle of an aggressive liquidation strategy to clear out old styles and make way for new ones, which weighed heavily on its margins. Several quarters later, however, Nike is in a far better inventory position, which is a boon for margins.

During the quarter, inventories were down 14% to $8 billion.

Nike’s gross margin turnaround came as the retail environment overall has been flooded with steep promotions and discounts as retailers struggle to convince inflation-weary consumers to pay full price. In September when Nike reported fiscal first-quarter earnings, finance chief Friend said Nike was “cautiously planning for modest markdown improvements” given the overall promotional environment.

While the company repeatedly pointed out the overall promotional environment, it said the average sales price of footwear and apparel were up during the quarter and the average selling price grew across channels with higher-priced products proving particularly “resilient.”

The company attributed the gross margin uptick to “strategic pricing actions and lower ocean freight rates,” saying it was partially offset by unfavorable foreign exchange rates and higher product input costs.

As one of the last retailers to report earnings before the December holidays, investors are eager to hear good news when it comes to Nike’s expectations for the crucial shopping season. When many retailers issued holiday-quarter guidance in November, the commentary was largely tepid and cautious as companies looked to under promise and over deliver in an increasingly uncertain macro environment.

Nike struck a note that hit somewhere in the middle. Its sales miss and focus on cost cuts signal larger demand issues, but CEO John Donahoe was upbeat when discussing Black Friday week sales.

“We outpaced the industry, driving growth of close to 10%, Nike digital had its strongest Black Friday week ever and a record number of consumers shopped in our stores over the long Thanksgiving weekend,” said Donahoe.

China is another key part of the Nike story. As the region emerges from the Covid-19 pandemic and widespread lockdowns, China’s economic recovery has so far been a mixed bag. In November, retail sales climbed 10.1% in the region.

It was the fastest pace of growth since May, but those numbers were up against easy comparisons and the growth was largely driven by car sales and restaurants, according to a research note from Goldman Sachs.

During the quarter, China sales came in at $1.86 billion, which fell short of the $1.95 billion analysts had expected, according to StreetAccount. Sales in Europe, the Middle East and Africa also fell short of estimates, but revenue came in ahead in the North America, Asia-Pacific and Latin America markets, according to StreetAccount.

Read the full earnings release here.

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Nike misses on revenue for first time in two years, but stock pops as earnings, margins beat

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Nike reported revenue Thursday that fell short of Wall Street’s sales expectations for the first time in two years, but it beat on earnings and gross margin estimates, sending its stock soaring in after-hours trading.

Here’s how the sneaker giant performed during its fiscal first quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

  • Earnings per share: 94 cents vs. 75 cents expected
  • Revenue: $12.94 billion vs. $12.98 billion expected

The company’s reported net income for the three-month period that ended August 31 was $1.45 billion, or 94 cents per share, compared with $1.47 billion, or 93 cents per share, a year earlier.

Sales rose to $12.94 billion, up about 2% from $12.69 billion a year earlier. Revenue for the quarter was just shy of the $12.98 billion analysts had expected, according to LSEG.

Nike shares rose about 8% in extended trading Thursday.

The retailer maintained its full-year guidance of revenue growth in the mid-single digits and gross margin expansion of 1.4 to 1.6 percentage points.

“We’re closely monitoring the operating environment, including foreign currency exchange rates, consumer demand over the holiday season, and our second half wholesale order book,” said finance chief Matthew Friend on a call with analysts.

“We are cautiously planning for modest markdown improvements for the balance of the year, given the promotional environment,” he added.

For the second quarter, Nike expects revenue growth to be up slightly versus the prior year and gross margins to grow by about 1 percentage point versus the prior year.

Investors have been laser focused on Nike’s recovery in China, its relationship with its wholesale partners and how the resumption of student loan payments will impact sales. 

They’re also keen to see Nike’s margins recover after bloated inventories, high promotions and supply chain woes contributed to lower profits over the last few quarters. 

During the quarter, Nike’s gross margin fell about 0.1 percentage points to 44.2%, but it was higher than the 43.7% analysts had expected, according to StreetAccount. The company attributed the gross margin drop to higher product costs and currency exchange rates, but those trends were offset by price increases, which contributed to the earnings beat.

Sales in China grew by 5% compared to the year-ago period to $1.7 billion, which fell short of the $1.8 billion analysts had expected, according to StreetAccount.

During the previous quarter ended May 31, Nike saw China sales jump 16% compared to the year-ago period. But the numbers were against easy comparisons because the region was still under Covid-related lockdown orders during the prior year. 

While Nike remains bullish on China, the region’s economic recovery has so far been a mixed bag. Following a sluggish July, retail sales picked up during the month of August to rise 4.6% compared to the prior year, beating expectations of a 3% growth forecast by Reuters. 

“We feel good about the market there and our position,” said CEO John Donahoe, adding he’s traveled to China twice in the last four months. “Frankly, a couple things stand out. One, sport is back in China, you can just feel it, and that gives us great confidence about the future and the Chinese consumer in our segment, regardless of the macroeconomic outlook there.”

Nike saw sales jumps in every region besides North America, its largest market by revenue. Sales in North America fell 2% from the year-ago period to $5.42 billion, just above the $5.39 billion analysts had expected, according to StreetAccount.

In Europe, the Middle East and Africa, sales were up 8% at $3.61 billion. That compared with the $3.51 billion analysts had expected. Sales in its Latin America and Asia Pacific unit came in 2% higher at $1.57 billion, just shy of the $1.59 billion analysts had expected, according to StreetAccount.

The Converse brand, on the other hand, fell well short of expectations for a second quarter in a row. Sales came in at $588 million, down 9% compared to the year-ago period. Analysts had expected sales to be about $660 million, according to StreetAccount.

Nike’s direct channel, which includes its owned stores and its digital channel, led the retailer’s growth during the quarter and was up 6% compared to the prior year. In June, the company noticed that shoppers were shifting towards its stores over its digital channels, signaling consumers are getting closer to pre-pandemic shopping habits.

“We continue to see that consumers want to connect directly and personally with our brands and in fact, member engagement within our direct business is up double digits versus the prior year with increasing average order values,” said Friend.

“Our stores delivered an especially strong quarter with traffic up double digits from last year, and members driving an increasing share of our business as consumers shifted from our digital to physical channels… Our team was nimble in transitioning inventory to capture higher full-price sales across our entire store fleet,” he said.

When it comes to its wholesale revenues, Nike’s relationship with those partners have been rocky. As the company has pivoted to a direct-to-consumer model, it has focused on driving sales online and in its stores at the expense of its wholesale accounts. 

However, as Nike grappled with excess inventories throughout 2023, it relied on those partners to move through that merchandise. It has now restored its relationship with both Macy’s and DSW – accounts that it previously cut in favor of its DTC strategy. 

Some analysts expected Nike’s wholesale revenue to be sluggish during the quarter because excess inventories have been a problem throughout the retail industry – and some wholesalers are being more particular in what they order to avoid another backlog. 

Wholesale revenue during the quarter was flat compared to the year-ago period at $7 billion.

Both Donahoe and Friend made it clear to analysts that Nike is ready to meet customers in all channels — including through wholesalers and directly. The retailer shouted out Dick’s Sporting Goods as one of its key partners and noted that it’s still in the process of resetting its business with Footlocker, which has seen two quarters in a row of plunging sales and profits.

Despite the shift in how it’s working with wholesalers, Nike insisted that direct sales will pave the way to its future growth.

“Ultimately, we have a segmented portfolio of strong partners across price points and channels. With no single partner representing more than a mid-single digit of Nike’s total business,” said Friend.

“While the ultimate landing spot of digital and direct isn’t as clear, we do believe we’re going to be a more direct and a more digital company, and a more profitable company,” he said. “And there’s a channel mix and channel profitability opportunity that comes with that as well.”

Meanwhile, inventories fell 10% to $8.7 billion. The drop was driven by a decrease in units but offset by product mix and higher manufacturing and production costs.

“On the whole, we’re very comfortable with the level of inventory in the marketplace in relation to the retail sales that we’re seeing as we begin increasing levels of wholesale sell in our second half,” said Friend.

Amid decades-high inflation rates, consumers have been pulling back on apparel and footwear. With the resumption of student loan payments looming ahead, some analysts expect those sectors to take an even greater hit. 

Jefferies conducted a survey on U.S. consumer spending and found 54% of respondents plan to spend less on apparel and accessories. Meanwhile, 46% plan to spend less on footwear, which doesn’t bode well for Nike. 

It’s still too early to gauge the impact of student loan payments on Nike. Its first quarter ended in late August, and payments aren’t set to resume until October.

During the quarter, footwear sales rose 4% to $8.4 billion, making up about 68% of Nike’s total sales. Apparel was down 1% at $3.4 billion.

Correction: Nike’s gross margin fell 0.1 percentage points. An earlier version of this story misstated that figure.

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Retire Right With These 6 Billionaire Stocks That Pay Dividends Monthly

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Here are six real estate investment trusts owned by billionaires like Ken Griffin and Jim Simons that pay dividends monthly.

By John Dobosz, Forbes Staff

It’s no secret that dividends are highly prized by investors because they provide reliable income and a source of investment returns, even when stock prices are falling. Most dividend-paying stocks kick out cash dividends every three months, but a much smaller subset of a few dozen stocks pay on a monthly basis, providing a faster flow of income, or a quickened pace of compounding if investors reinvest dividends into additional shares of stock.

Most U.S.-listed stocks paying monthly dividends are either real estate investment trusts (REITs), business development companies, or oil and gas royalty trusts. These so-called “pass-through” entities do not pay tax on the corporate level because they distribute nearly all their income as dividends, which are taxed as ordinary income for shareholders who receive them, if the REITs are not held within an individual retirement account.

Like rent checks earned every month from rental properties, several of the worlds’ top billionaire investors have been scooping up monthly dividends from REITs that specialize in different niches of the property market, including shopping centers, office buildings, distribution centers and warehouses, recreational facilities, and nursing homes.

Sharply higher borrowing costs are not a friend of REITs. They increase interest cost on new debt and could adversely impact the ability to refinance existing debt, sell assets, and limit acquisition and development activities. Nonetheless, even as rising interest rates present headwinds for real estate, REITs remain ideal securities for income-oriented investors and for anyone interested in generating total return from dividends and long-term capital appreciation potential.

Regarding the importance of dividends in total return, pioneering female income investor Geraldine Weiss, longtime editor of Investment Quality Trends, was fond of saying, “We all hope for capital gains, but the only thing we can really count on is the dividend.”

The six REITs presented below are all monthly dividend-payers with annual yields ranging from 3.3% to 7.6%, making them good candidates for those looking for steady retirement income. All have payouts comfortably below their cash flow and are trading at discounted valuations relative to history. In addition, the most recent U.S. Securities and Exchange Commission filings show significant ownership by highly skilled billionaire investors.

Agree Realty (ADC)

Dividend Yield: 4.8%

Market Capitalization: $5.9 billion

Billionaire Ownership: Ken Fisher, Bruce Flatt, Ken Griffin, Ray Dalio, Steven Cohen, Jim Simons, Israel Englander, Clifford Asness

Bloomfield Hills, Mich.-based Agree Realty (ADC) is focused squarely on retail. It owns, acquires, develops, and manages net-lease properties rented to national retail tenants that include Walmart, Dollar General, Tractor Supply, Best Buy, Dollar Tree, and Kroger. Revenue is on the rise, expected to grow 20% this year to $517.2 million, with funds from operations up 2% to $3.95 per share. REITs are traditionally valued as a multiple of funds from operations (FFO), which differ from earnings in that they do not include the impact of interest, taxes, depreciation, or gains/losses on the sale of properties. Agree Realty trades at 15.1 times expected FFO, which is a 21% discount to its five-year average price/FFO ratio of 19.2. With a debt-to-equity ratio of 0.43, Agree is not stressed financially.

With ADC shares down 18% from their February high, it’s a clear sign of bullishness that company insiders are buying the stock hand-over-fist. Five different officers and directors, including the chief financial officer, purchased a total of $4.56 million worth of stock in the month of August. Executive Chairman Richard Agree personally ponied up $1.9 million to buy 30,000 shares. Billionaire investors have also shown a strong appetite for Agree. Israel Englander’s Millennium Management hedge fund reported new buys in the first and second quarters of 2023 and now owns 1.02 million shares of ADC, representing 1.1% of outstanding shares.

Phillips Edison & Co. (PECO)

Dividend Yield: 3.3%

Market Capitalization: $4.0 billion

Billionaire Ownership: Jim Simons, Clifford Asness, Ken Griffin, Ken Fisher

Phillips Edison & Co. (PECO), a midcap REIT out of Cincinnati, Ohio, specializes in ownership of shopping centers anchored by grocery stores. This REIT was founded in 1991 by Jeffrey Edison and Michael Phillips. Mr. Edison is the current chairman and chief executive officer of Phillips Edison, which went public in July 2021, and he owns 335,000 of the 117.3 million shares outstanding.

PECO owns and operates a $6.2 billion national portfolio of 291 grocery-anchored shopping centers clustered in Florida, the Eastern Seaboard, the Midwest, and along the Pacific coast. Top tenants as a percentage of total revenue are Kroger (6.2%), Publix (5.8%), Albertsons (4.1%), Koninklijke Ahold Delhaize N.V. (3.9%), and Walmart (2%). Revenue this year is expected to grow 6.6% to $597.5 million, with funds from operations up 6% to $2.28 per share.

Over the past 12 months, Phillips Edison generated free cash flow of $1.29 per share, which is comfortably above $1.12 per share in annual dividends, which are paid at a rate of $0.0933 per month, good for a dividend yield of 3.3% at current prices. Dividend growth is also encouraging. Since its IPO two years ago, PECO has hiked its monthly payout at a 4.8% annual rate.

The appealing fundamentals of PECO are nicely complemented by insider buying and billionaire ownership. On May 16, board member Leslie Chao laid out $292,000 to acquire 10,000 shares of PECO. Billionaire Jim Simons of Renaissance Technologies reports ownership of 187,000 shares, Clifford Asness of AQR Capital holds 14,000 shares, and Ken Griffin’s Citadel reports a stake of 7,000 shares. Ken Fisher owns 9,000 shares.

Realty Income (O)

Dividend Yield: 5.4%

Market Capitalization: $40.4 billion

Billionaire Ownership: Ken Griffin, Ray Dalio, Jim Simons, Israel Englander, Clifford Asness

With a market capitalization north of $40 billion, San Diego, Calif.-based Realty Income (O) is the biggest name in this group of monthly dividend payers. It owns 13,100 retail, industrial, and agricultural properties leased to 1,300 tenants in 85 separate industries, allowing Realty Income to generate stable cash flow and deliver consistent monthly dividends. The current property portfolio includes high-quality real estate in all 50 states, as well as Puerto Rico, the United Kingdom, Spain, Italy, and Ireland.

Realty Income has paid steadily rising dividends over its entire 54-year operating history, and dividend growth has outpaced inflation. Realty Income has hiked its dividend 5.3% annually over the past 10 years, and 4.7% annually since its initial public offering in 1994. Dividends of $3.07 per year are comfortably supported by $4.29 in free cash flow per share and provide investors with a current dividend yield of 5.4%.

Revenue has grown 21.5% annually over the past 10 years and is seen rising 18% to $3.9 billion in 2023. Funds from operations are expected to increase 2% to $4.12 per share. At 13.5 times FFO, Realty Income trades 25% below its five-year average price/FFO multiple of 18.1. Debt is manageable at 63% of equity.

The value of Realty Income was compelling enough for Israel Englander’s Millennium Management to establish a new position of 1.28 million shares at a cost of $60.92 per share in the second quarter of 2023—a cost basis 7% above the current stock price just below $57 per share. Jim Simons of Renaissance Technologies bought 378,000 shares during the same period at similar prices. With smaller stakes, Clifford Asness of AQR owns 97,000 shares, and Ray Dalio’s Bridgewater holds 90,000 shares.

STAG Industrial (STAG)

Dividend Yield: 4.2%

Market Capitalization: $6.3 billion

Billionaire Ownership: Israel Englander, Bruce Flatt, Ken Griffin, Steven Cohen, Clifford Asness

Boston-based STAG Industrial (STAG) was founded in 2010 and specializes in owning and managing huge distribution centers and warehouses along interstate highways. STAG owns 561 buildings in 41 states with approximately 111.6. million rentable square feet. Accounting for 2.8% of $654.4 million in 2022 revenue, Amazon.com is the company’s largest tenant. Other major clients include American Tire Distributors, Hachette Book Group, Tempur Sealy, DHL, FedEx, Penguin Random House, and Ford Motor Company.

Analysts who follow STAG expect this year’s revenue to rise 6.4% to $696.5 million, and FFO to grow 2.3% to $2.26 per share. At 14.9 times current year’s FFO, STAG trades 9.3% below its five-year average price-to-FFO ratio of 16.0. Funds from operations have grown at an 18.8% compound annual rate over the past five years, and free cash flow has increased 18.9% annually over the same stretch of time.

Billionaires are buyers. Israel Englander’s Millennium Management has been the most bullish, taking down 1.1 million shares in the second quarter and now owns 0.62% of STAG’s outstanding shares. Clifford Asness owns 322,000 shares, Ken Fisher holds 303,000 shares, and Ken Griffin’s Citadel owns 90,000 shares. Bruce Flatt’s Brookfield doubled its stake in the second quarter and now owns 48,000 shares.

EPR Properties (EPR)

Dividend Yield: 7.6%

Market Capitalization: $3.3 billion

Billionaire Ownership: Ken Griffin, Jim Simons, Israel Englander, Clifford Asness

Founded in 1997, Kansas City, Mo.-based EPR Properties (EPR) owns a $5.4 billion portfolio of specialty properties concentrated in entertainment, education, and recreation. Properties include 172 movie theaters, 67 charter schools, 41 early childhood centers, 25 golf entertainment complexes, 11 ski parks, and five water parks. EPR also owns one gaming property, Resorts World Catskills casino and resort in Sullivan County, N.Y. Largest tenants as a percentage of 2022 revenue are AMC Theatres (13.8%), Topgolf (13.7%), Regal Entertainment (12.7%), Cinemark (6.1%), and Vail Resorts (5.1%).

EPR’s revenue this year compared to 2022 is expected to jump 18.6% to $586.3 million, and FFO is expected to grow 7.7% to $5.05 per share. Priced at 8.7 times expected 2023 FFO, EPR trades 26.3% lower than itis five-year average price/FFO ratio of 11.8. It also trades 26.5% below its five-year average enterprise value-to-Ebitda ratio of 17.0.

EPR suspended its dividend in July 2020 after the onset of the Covid-19 pandemic but reinstated it one year later in July 2021, and the monthly payout has grown 4.9% annually over the past two years. Yielding 7.6%, EPR trades ex-dividend on August 30 for its next monthly payout of $0.275 per share.

Insiders are nibbling at the stock. On June 13, company director Caixia Ziegler bought 500 shares at $45.14 apiece. Among billionaire investors, Israel Englander and Ken Griffin both reduced their stakes in the second quarter but still own 675,000 and 477,000 shares, respectively. Jim Simons’ Renaissance Technologies holds 344,000 shares, and Clifford Asness of AQR reports owning 322,000 shares.

LTC Properties (LTC)

Dividend Yield: 7.2%

Market Capitalization: $1.3 billion

Billionaire Ownership: Ken Griffin, Jim Simons, Clifford Asness

Westlake Village, Calif.-based LTC Properties (LTC) invests in senior housing and health care properties, primarily through sale-leaseback transactions, mortgage financing, and structured finance deals that include mezzanine lending. Its portfolio includes 213 properties in 29 states with 29 operating partners. Based on gross real estate investments, the portfolio is composed of approximately 50% senior housing and 50% skilled nursing facilities. Based on each tenant’s share of 2022 revenue of $128.2 million, LTC’s largest tenants were Prestige Healthcare (14%), ALG Senior (10.4%), Brookdale Senior Living (8.9%), and Anthem Memory Care (6.2%).

LTC has been paying dividends since its inception in October 1992, and the payout has grown 2.4% annually over the past decade. Even though growth is not overwhelming, LTC’s dividends, currently paid at the rate of $0.19 per month, give the REIT a meaty yield of 7.2%. Annual dividends of $2.28 per share are covered by $2.54 in free cash flow per share over the past 12 months. Revenue this year is expected to creep higher by 1% to $129.1 million, and funds from operations are seen rising 2.7% to $2.63 per share. At 11.9 times current-year FFO, LTC trades 14.4% below its five-year average price/FFO ratio of 13.9.

Clifford Asness’ AQR hedge fund boosted its LTC holdings by 89% to 34,000 shares in the second quarter of 2023, while Jim Simons of Renaissance Technologies acquired 21,000 shares at $35.47 per share in the second quarter, and now owns 68,000 shares of LTC. Ken Griffin’s Citadel reports a small stake of 5,000 shares.

John Dobosz is a senior editor and editor of Forbes Billionaire Investor newsletter.

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ExxonMobil, Chevron’s big cash shows cheap gas isn’t coming back

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If you want a quick outlook on whether U.S. gas prices are likely to return to pre-Covid levels, a good place to start is earnings reports from Chevron and Exxon in the last week.

The outlook: Don’t count on it. In their fourth-quarter earnings reports, both companies showed clear signs of Big Oil’s renewed focus on managing costs, widening profit margins as oil prices stayed relatively high even after coming down considerably from last year’s highs, and confidence that they will be able to keep passing the rewards back to shareholders.

On Jan. 25, Chevron announced a $75 billion share buyback, which will allow it to use excess cash flow to cut the number of shares by up to as much as 20% — over multiple years and contingent on shares also used for employee options programs and M&A rather than just earnings per share increase. Chevron also raised its dividend to about 3.4%, double that of the Standard & Poor’s 500-stock index. On Jan. 31, Exxon announced it had spent $15.2 billion to acquire stock in 2022 – up from $155 million a year earlier, and authorized another $35 billion this year and next.

The moves are the latest page in the industry’s post-2020 playbook: To satisfy investors who pushed energy stocks down more than 40% in a rising stock market between 2014 and 2019, oil companies slowed down drilling overinvestment that had caused cash-flow losses estimated as high as $280 billion. With the conserved cash, they raised dividends and boosted stock buybacks – moves that helped oil stocks double in the year after the 2020 election, as U.S. gasoline prices rose by more than half.

Rob Thummel, senior portfolio manager at Tortoise Capital Advisors, which advises mutual funds on energy investing, said Chevron and Exxon are in position to increase the dividend, increase production, and buy back stock. “They are doing what mature companies do – generate a lot of cash and return it to shareholders,” he said.

Big oil sees political pushback on buybacks

Fuel prices at a Chevron gas station in Menlo Park, California, on Thursday, June 9, 2022.

David Paul Morris | Bloomberg | Getty Images

The industry’s reallocation of money to shareholders from new drilling comes as political leaders, including President Joe Biden, criticize oil companies for not restraining the price of gasoline as crude oil rose from $53 when Biden took office in 2021 to $77.50 now.  Exxon’s fourth-quarter profit margin of almost 14% of revenue compares to 11% a year ago.

“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends,” Biden said in October. “Not now. Not while a war is raging. You should be using these record-breaking profits to increase production and refining.”

The White House attacked both companies again this week after the buyback announcements.

In the market, and at the oil companies headquarters, it seems the opinions issued from the White House aren’t much of a factor in setting financial priorities. The price of oil is set on world markets, rather than by individual producers, Thummel said. The role of the Organization of Petroleum Exporting Countries, led by Saudi Arabia, in limiting production is the biggest factor in world prices. U.S. oil production, which does not have a central organization setting prices, has rebounded from a post-Covid low reached in April 2021, and reached 383 million barrels per month in October, closing in on the all-time high of 402 million in December 2019, according to U.S. government data.

Gas prices are also being hit by a loss of refining capacity. Part of this is longer-term, as refiners phased out less profitable facilities during the Covid-related demand drop, and following a wave of mergers forced by declining cash flow and share prices. And part of it stems from temporary shutdowns for maintenance made necessary by the cold wave in much of the country in December, CFRA Research analyst Stewart Glickman said.

Of the two biggest U.S. oil producers, Chevron made the more dramatic changes in the fourth quarter earnings releases, since Exxon had announced its buyback acceleration earlier, Glickman said.

The benchmark now is to spend roughly a third of operating cash flow on capital investment, a third on dividends and a third on stock buybacks. The buybacks can be dialed back if oil prices fall, and would likely be the first big cost cut oil producers would make if crude fell back to $60 a barrel from the current range about $77, he said. Buybacks, unlike dividends, aren’t treated as a “must” by investors each quarter, while cutting a dividend can lead to mass selling by investors.

Chevron is pretty close to Glickman’s recipe, with $49.6 billion of 2022 cash flow yielding $11 billion in dividend payments, $11.3 billion in share buybacks that were accelerating as the year ended to the $15 billion annual pace, and $12 billion in capital investment – enough to boost U.S. production by about 4% even as its international production dropped. Exxon made $76.8 billion in operating cash flow, invested $18 billion back into the business, spent $14.9 billion on dividends and $15.2 billion in stock purchases, according to its cash flow statement.

“What we learned from [earnings announcements] is that the industry is very committed to a conservative approach to spending,” Glickman said. “They could [drill more], but they would have to sacrifice their return thresholds, and neither they nor their shareholders are interested. I don’t blame them.”

Oil production is increasing

Despite the push to pay out more money, the companies have begun to produce slightly more oil in the U.S.

Chevron said its U.S. oil production gain was led by a double-digit increase in the Permian Basin of Texas. Exxon also said Permian production led its U.S. results, rising by nearly 90,000 barrels per day.

“Growth matters when it’s profitable,” Chevron CEO Mike Wirth said on the company’s earnings call on Jan. 27. Chief Financial Officer Pierre Breber said the company’s four major financial goals are dividend growth, buyback growth, capital spending and reducing debt.

Slower growth and cash distribution is the right path for an industry that is growing more slowly, Thummel said, especially since the government is prodding utilities away from relying on natural gas to make electricity and offering consumers tax credits to swap gasoline-powered cars and SUVs for electric models. 

In the early part of the last decade, investors applauded energy companies for investing more than their entire operating profit in new wells, believing that hydraulic fracking would propel the sector to a new wave of growth, Glickman said. And while U.S. production more than doubled during the fracking boom, it failed to produce the expected profit. Today, politicians are trying to foster a transition away from fossil fuels, making it dicey for Big Oil to invest in large offshore drilling plans that may need decades to pay off, he added.

“Why on earth would these companies agree to play ball with that kind of attitude?” he said.

The oil companies’ new approach stands in sharp contrast to that of EV maker Tesla, which has resisted shareholder pressure to begin buying back stock as it begins taking share in a market entwined with the oil companies. Tesla has hung on to its cash flow even as it completes a major factory-building campaign that has seen it add new plants in Texas, China, and Germany to its initial production facility in California. The company also produces batteries for its vehicles in Nevada.

That path works for Tesla because it is addressing a fast-growing market for EVs, while oil companies are trying to milk the cash from their existing, low-growth businesses and invest in new ones like carbon capture before current sources of cash flow like gasoline sales begin to shrink, Glickman said. But even Tesla should be returning cash to holders after a sharp decline in shares last year, Wedbush analyst Dan Ives said.

“Our view is that it’s a no-brainer that Tesla should do a buyback now,” Ives said. “Tesla is in a robust position financially and this would send an important signal. The biggest capital spending is in the rearview mirror for now.” 

But Tesla’s most obvious short-term use of its $22 billion cash hoard might be preparing for any possible impact on profits of the price cuts it announced Jan. 13. 

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