With higher interest rates, there has been an increasing concern about a potential recession in the United States. A decline in retail sales in the last two months of 2022 was concerning. However, retail sales surged in January, increasing by the most in two years. With the strong resilience shown by the consumer sector, it might be a good time to buy dividend-paying retail stocks.
There are several reasons to consider retail stocks as a part of the core investing portfolio. First, consumption in the U.S. accounts for 70% of the GDP, with retail sales accounting for 40% (the rest being service sales). Retail spending is an integral part of growth and a policymakers’ key focus.
Further, some of the largest dividend-paying retail stocks have robust cash flows and low beta. It’s important to hold these stocks for capital preservation and regular income through cash dividends.
It’s also worth noting that the retail sector has faced inflationary headwinds in the last few quarters. Retail stocks are therefore trading at attractive valuations. Once inflation eases, these dividend-paying retail stocks are poised for meaningful capital gains.
Let’s discuss three retail stocks worth buying at current levels.
|The Home Depot
Costco Wholesale (COST)
Costco Wholesale (NASDAQ:COST) is among the best dividend-paying retail stocks to consider at current levels. Even with headwinds of inflation, COST stock has remained sideways in the last 12 months. The 0.7% dividend yield stock looks poised for upside as quarterly results remain promising.
For Q1 2023, Costco reported sales of $53.4 billion. On a year-on-year basis, sales increased by 8%, with comparable store sales increasing by 6.6%. It’s worth noting that in the last 12 months, Costco reported $4.3 billion in membership fee revenue. I expect recurring revenue to swell with high renewal rates and the opening of new outlets. This will support an upside in cash flows.
From a dividend perspective, Costco has reported dividend growth at a CAGR of 13% since May 2004. I expect dividend growth to sustain in the coming years, considering Costco continues strengthening its omnichannel presence. Gradual expansion in China is also a growth catalyst.
At a forward price-earnings ratio of 24, Walmart’s (NYSE:WMT) stock looks attractive. WMT stock offers a dividend yield of 1.53%, and cash flows are likely to remain robust.
For Q3 2023, Walmart reported healthy revenue growth of 8.7% on a year-on-year basis. I expect company-wide growth to remain healthy considering the following factors.
First, Walmart has been increasing its global presence, and Q3 growth was supported by Flipkart and Walmex. For Q3 2023, Walmart International reported sales of $25.3 billion, which was higher by 7.1% on a year-on-year basis.
Further, the company continues to gain market share in the U.S. grocery business. That’s another attractive growth segment besides health and wellness. It’s also worth noting that Walmart reported a capital expenditure of $12.1 billion for the first nine months of 2023. This implies an annual capex visibility of $16 billion. These investments will serve as growth catalysts.
Overall, WMT stock has an attractive dividend yield and is a low-beta stock. It’s among the dividend-paying retail stocks that I would hold in the core portfolio.
The Home Depot (HD)
The Home Depot (NYSE:HD) stock offers a dividend yield of 2.39%. HD stock also looks attractively valued at a forward price-earnings ratio of 19.0.
In terms of financial performance, Home Depot reported sales growth of 5.6% for Q3 2022 on a year-on-year basis. For 2022, the company has guided for comparable sales growth of 3%.
For the first nine months of 2022, the company reported operating and free cash flow of $10 billion and $7.8 billion, respectively. With an annualized FCF visibility in excess of $10 billion, the company is positioned to increase dividends.
From a revenue growth perspective, there are two points to note. First, the company opened three new stores in Q3 2022. This increased the total store count to 2,319. The continued increases in comparable store sales coupled with new store openings are also growth catalysts. Furthermore, the growth in sales coming from Pro and DIY customers has been encouraging. This will continue to boost big-ticket comparable transactions.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.