Image Source: Mike Mozart. Dick's Sporting Goods put up its best same-store-sales growth rate in history during 2020. We continue to like shares of the sporting goods retailer in the Dividend Growth Newsletter portfolio.

By Brian Nelson, CFA

Kudos to one of the latest additions to the Dividend Growth Newsletter portfolio, Dick’s Sporting Goods (DKS). The company announced March 9 concurrent with its fourth-quarter 2020 press release that it increased its quarterly payout 16%, to $0.3625 per share, or $1.45 per share on an annualized basis, good enough for a nice ~2% forward expected dividend yield. The latest iteration of the Dividend Growth Newsletter portfolio can be found here.

With a Dividend Cushion ratio of 3.2 at its last update, we expect future dividend growth to be robust at Dick’s Sporting Goods for years to come. The company’s shares aren’t too pricey either and we point to $80 as the high end of our fair value estimate range (the stock is trading hands at $70 at the time of this writing). Investors looking for higher-yielding equities should consider adding our High Yield Dividend Newsletter to their membership here.

Though COVID-19 presented many challenges, Dick’s Sporting Goods had a very strong 2020. For the full-year, net sales leapt 9.5% thanks to its best same-store sales performance ever of 9.9% (the full-year to net sales growth mark was weighed down by some temporary store closings). The big driver, of course, was e-commerce where sales doubled, with roughly 30% of total sales of the sporting goods retailer coming from digital channels. 2020 earnings per share advanced 71% and 66%, respectively, on a GAAP and non-GAAP basis.

Dick’s Sporting Goods will start to bump into difficult year-over-year comps given the outstanding year it had in 2020, but we’re taking more of a long-term view on this dividend growth prospect. For 2021, net sales are expected to advance ~1.6% at the midpoint of its guidance range (with consolidated same-store sales targeted in the range of -2% to 2%). Earnings per share on a GAAP and non-GAAP basis are targeted in the range of $3.81-$4.55 and $4.40-$5.20, respectively. The measures aren’t as robust as the $5.72 and $6.12 per-share marks it achieved during 2020, respectively.

Still, the midpoint of the 2021 bottom-line targets suggests an increase of 25% and 30% relative to pre-COVID normalized numbers in 2019, respectively, and Dick’s Sporting Goods' omnichannel capabilities position it well for the long run. Secular trends toward healthier living and active lifestyles coupled with favorable shifts in consumer demand, particularly in the areas of golf and home fitness, should continue to offer tailwinds to its business. In the fourth-quarter press release, management noted that its business has “so much momentum, and (it has) been pleased with (its) start to the year.”

We continue to like Dick’s Sporting Goods as an idea in the simulated Dividend Growth Newsletter portfolio and point to its tremendous free cash flow generation in fiscal 2020 as just one of the reasons why. It hauled in $1.55 billion in cash flow from operations, up from $404.6 million in the year-ago period, while spending $224.1 million in capital spending (capital expenditures were $217.5 million in 2019). Traditional free cash flow generation of $1.33 billion in 2020 surged from the $187.2 million it pulled in during 2019. Dick's Sporting Goods paid out $107.4 million in dividends to stockholders in 2020.

The company’s balance sheet is healthy, too, with ~$1.7 billion in cash and cash equivalents on the books relative to ~$418.5 million in convertible senior notes due 2025 and $2.3 billion in long-term operating lease liabilities (it also holds ~$472.7 million in short-term operating lease liabilities). In light of Dick’s Sporting Goods’ strong free cash flow generation and healthy cash position on the books, we think its balance sheet is strong. Total inventory fell 11.3% from last year’s mark, revealing the company’s product selection is moving off the shelves nicely.

Concluding Thoughts

Dick’s Sporting Goods showcased the strength of its business model during 2020, and while it may not be able to duplicate the results in 2021, we think the future is bright. Free cash flow generation trends are solid, its balance sheet is healthy, and dividend coverage is sound. As more and more consumers choose healthier lifestyles, Dick’s Sporting Goods remains in a sweet spot to capture continued demand. With a solid 2% dividend yield, the company remains a holding in the simulated Dividend Growth Newsletter portfolio. We expect continued strong dividend growth for years to come. For those interested in reading more about Dick's Sporting Goods, please check out our latest article, "Omni-Channel Strategy at Dick’s Sporting Goods Makes It a Long-Term Dividend Growth Idea."

Downloads

Dick's Sporting Goods' Stock Report (pdf) >>

Dick’s Sporting Goods' Dividend Report (pdf) >>

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Brian Nelson owns shares in SPY, SCHG, QQQ, and IWM. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.