Ross Stores Telegraphs Improvement Through Dividend Hike

“The show stopper when it comes to dividend hikes, that name is Ross Stores, as in Ross, dress for less. This low-price retailer raised its quarterly dividend from 11 cents to 16 cents last Thursday. Do you know that is a 45% dividend surge? That’s extraordinary. Still, they have a pint sized yield, but that’s not the theme of this week…

Think of a massive dividend hike as being similar to a Babe Ruth-style called shot. The people running Ross Stores tell us they think their business is in a position to hit it out of the park. And to keep on doing it over and over and over again. You don’t just raise the dividend and pay it once, you pay it throughout. Ross Stores is trying to beat this fact into our heads…

With the economy recovering, companies are back in growth mode. Looking to move into new regions in 2010. Ross Stores has about 1,000 locations in 27 states, very little presence in the Northeast or Midwest, a lot of room to grow.” — CNBC’s Mad Money 2/10/2010

On Mad Money this week, Jim Cramer is identifying companies that are raising dividends because that is a great signal to the market that management is confident about the future. In the case of Ross Stores (ROST), they announced a massive dividend hike last week following the close of their fiscal fourth quarter in January. The company is not scheduled to report results for this quarter until March 18th, but this corporate action is showing the market that management believes the company has performed quite well recently. The dividend yield is not huge, but after the 45% lift the implied dividend yield is a respectable 1.4%.

Obviously, a dividend hike of this magnitude is certainly something that investors like to see, and with the payout ratio still just 18%, the company still will have plenty of earnings to reinvest in the company to propel growth. Ross Stores has benefited from a shift in consumer behavior to more frugality, and we think that this is a trend that likely will not soon fall away. There are still very persistent pressures on consumers such as unemployment and shrinking consumer credit that may take years to reverse.

Ross is one stock that analysts seem to be able to nail earnings on in the past. Considering the fact that quarterly earnings estimates have been in-line with results each of the last four quarters, and consensus estimates were never more than 2 cents off dating back to 2007. If earnings estimates continue this consistency, Ross stands to grow earnings by about 52% in fiscal 2010 (ended in January) and then a still impressive 10% growth in fiscal 2011 that just began. While we view these projections to be quite impressive, the stock is not all that cheap at current levels after advancing 46% in the last year. We currently have a Fairly Valued rating on ROST although it is clear that the company is seeing significantly better fundamentals recently.

When we look at how the market has historically valued Ross Stores, we think that the fundamentals are being adequately recognized in this market. For example, over the past ten years ROST has historically traded for between 8.7x to 14.4x cash earnings, but the current price-to-cash earnings is right around 10x. Furthermore, the current price-to-sales is .79x which is near the middle of the historically normal range of .60x to 1.00x. Last week’s announcement about raising their dividend is certainly a positive in our analysis, but at this time it is not a significant enough event to budge us from our current neutral stance.

Ross Stores Telegraphs Improvement Through Dividend Hike

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