High Quality Dividend Stock Universe: DKS – Great Business But Overvalued

Company Description

DICK’S Sporting Goods, Inc. (NYSE:DKS) along with its subsidiaries operates as a sporting goods retailer primarily in the eastern United States. The company has a market cap of roughly $18B and employs over 37,000 people. It went public approximately 22 years ago on October 15, 2002, and has grown by 9,065% since.

Quality

Let’s review a few key financial metrics to determine if DICK’S is a high-quality business and deserving of a spot in the High Quality Dividend Stock Investable Universe. If you recall from the description of the Investable Universe, businesses that are of high quality tend to have a growing revenue stream, healthy margins and a strong return on invested capital.

Revenue per share has grown at a compounded rate of 11.87% during the past 10 years, with a sizable increase shortly post-pandemic that has since flattened out a bit.

The gross profit margin has generally hovered in the 30% range and during the past few years improved to the mid-30% range.

DICK’S saw its ROIC significantly improve post-pandemic by a nearly 3x multiple. More recently, the ROIC has trended lower, yet still remains lucrative, right at around 20%.

Overall, these metrics are healthy and long-term trends are favorable. In my opinion, DICK’S is a high-quality business.

Dividend

DICK’S pays a quarterly dividend of $1.1 putting the company on pace to payout $4.40 in 2024. This would be a 10% annual increase over 2023 where shareholders received a total of $4.00 in dividend payments. In 2023, DICK’S raised its dividend rate by more than 100%, significantly improving its short and long-term dividend growth rates. The 3, 5 and 10 year rate of dividend growth stand at 45.98%, 33.24% and 23.72%, respectively. Supporting this very healthy pace of dividend increases is a respectable payout ratio that the company has maintained below 33% for the past decade.

Past Performance

One of the key components of this investable universe is that we want to target companies that are already considered to be “winners”. So let’s take a look at DICK’S long-term total return. In its nearly 22-year period as a publicly traded company, DICK’S has delivered a total return of 9,065% or a 22.9% compounded annual growth rate. More recently, during the past decade, the share price has increased by nearly 300% or at an annualized rate of 15.36%. That is a phenomenal long-term run, well above market averages. We can tell from the chart below, a significant portion of this upside came directly from the post-pandemic period. In my opinion, DICK’S should be classified as a long-term winner and is deserving of a spot in this investable universe.

Earnings Update

On Wednesday, September 4th, DICK’S released their Q2 earnings with both a top-line Revenue beat by $40M and bottom-line EPS beat by $0.51. 2024 guidance for comparable sales was also increased to a range of 2.5% to 3.5%, from prior estimates of 2% to 3%. In addition, 2024 EPS guidance was raised to a range of $13.55-13.90, up from $13.35-13.75.

Overall, the earnings report was strong. Sales increased by 7.8% to just under $3.5B and comparable sales were up 4.5%, both driven by an increase in average ticket and transactions.

The gross profit margin improved to 36.73% (up 2.31%) driven by higher merchandise margin and leverage on occupancy costs.

Earnings per share of $4.37 were up about 55% from the prior year. With the TTM EPS of $14.06 increasing 13.12% over the prior period.

However, the news was not well received by the market with the stock opening about 9% lower relative to the closing price the prior day. Shares of the stock are down a little more than 11% over the past 5 days.

You can read/listen to the full earnings call here.

Valuation

To determine if DICK’S is potentially attractively valued today, let’s take a look at its valuation from a free cash flow perspective.

You can see that the valuation model is somewhat erratic, but this is tied to the change in free cash flow per share growth for the company. DICK’S saw a significant improvement in its FCF/share in 2020, jumping from $2.14 to over $15. In 2021, the FCF/share figure will remain flat but has trended lower during the last 3 years. This erratic movement makes it difficult to smooth out a long-term FCF valuation trend; hence, the valuation model charted above should be viewed with a grain of salt.

Long-term FCF/share growth stands at 16.4% which is very healthy, however this trend may be difficult to sustain in the future with analysts projecting 6-7% growth over the next 3-5 years.

Despite the low confidence in this valuation model, based on the projected growth trends I have to rate the stock as a “Trim”. I believe the stock may potentially be overvalued and will not deliver an attractive rate of return in the near future. My trim rating is not necessarily a call to sell the stock, it is merely a suggestion to consider trimming this position if a more lucrative investment opportunity presents itself, and capital is required to capitalize on such opportunity.

Investable Universe Update

Here is a valuation rating and expected rate of return update for all 50 stocks in the High Quality Dividend Stock Investable Universe. Changes are summarized below.

Overall the changes in ratings are favorable with more stocks moving from Hold/Trim to Buy/Strong Buy.

4 stocks have moved up to a “Strong Buy” rating.

• Jack Henry and Associates (JKHY) previous rating “Buy”
• Lincoln Electric (LECO) previous rating “Buy”
• Pool Corporation (POOL) previous rating “Buy”
• The Toro Company (TTC) previous rating “Trim”

2 stocks have moved down from a “Strong Buy” to a “Buy” rating.

• FactSet Research Systems (FDS)
• Visa (V)

6 stocks have moved from a “Hold” rating to a “Buy” rating.

• Allegion plc (ALLE)
• Fastenal Company (FAST)
• W.W. Grainger (GWW)
• Home Depot (HD)
• Lam Research (LRCX)
• Monolithic Power Systems (MPWR)

1 stock has moved up from a “Trim” rating to a “Hold” rating.

3 model portfolios were put into place at the beginning of September and will be tracked and documented as part of this investable universe.

The first model portfolio tracks the entire universe. The partial (price only) return for this model is -4.07% thus far, relative to -4.18% for SPDR S&P 500 Trust ETF (SPY) and -2.98% for Schwab’s US Dividend Equity ETF (SCHD).

The second model portfolio tracks a buy-and-hold portfolio of stocks rated as a “Strong Buy” at the start of each month. This portfolio is made up of 10 stocks and currently is down 1.69%.

The third model portfolio tracks a buy-and-hold portfolio of stocks rated as a “Buy” or better at the start of each month. This portfolio is made up of 21 stocks and is currently down 3.35%.