Bed Bath & Beyond Just Stunned Wall Street
Investors have given up on Bed Bath & Beyond Inc. (NASDAQ:BBBY) stock, so management is looking for a new way to grab their attention.
On Wednesday, the company announced its first dividend. The home furnishing retailer declared a quarterly distribution of $0.125, payable July 19 to shareholders of record June 17. (Source: “Bed Bath & Beyond Inc. Reports Results For Fiscal 2015 Fourth Quarter And Full Year,” Bed Bath & Beyond, April 6, 2016.)
The dividend is just the latest way for executives to return capital to shareholders. Last quarter, the board authorized a new $2.5-billion share buyback program. Over the past three months alone, the company has repurchased over $327.0 million of BBBY stock, representing about seven million shares.
What Bed Bath & Beyond’s Dividend Means for Its Future
The news is a big win for shareholders.
With a store in every shopping center across America, Bed Bath & Beyond is now a mature business. Online competition has hammered the company’s margins. Every dollar reinvested back into the operations is now earning a lower return on investment than ever before.
Managers in this situation face three choices: 1) They can buy growth; 2) they can ignore the problem and continue their expansion; or 3) they can return money to shareholders.
Most executives choose a combination of option one and two, which usually results in a raw deal for investors. Management is prone to overpaying for acquisitions. And while some companies are recharged by new investment (e.g. Apple), business turnarounds are difficult to pull off (e.g. Yahoo!).
Bed Bath & Beyond, however, seems to be opting for the third choice. Why plough billions of dollars back into a marginally profitable business? Instead, give the money back to shareholders so they can earn better returns elsewhere.
The reward for this is twofold. First, if the stock is selling below its intrinsic value, then the company is effectively buying $1.00 for $0.50. And when directors buy the company’s stock back in the market, they demonstrate a concern for shareholders rather than an egotistic need to build an empire.
None of this is to say Bed Bath & Beyond doesn’t have opportunities. Management is building up the company’s e-commerce a mobile business. With online sales growing at a double-digit clip, those efforts seem to be paying off.
Unfortunately, e-commerce will never be as profitable as the original brick-and-mortar store. Bed Bath & Beyond’s best days are behind it. Management, thankfully, doesn’t have its head in the sand.
More Dividend Hikes on the Way?
Based on Thursday’s opening share price, BBBY stock now yields about one percent. Not enough to whet the appetite of most income investors. However, this likely won’t be the last word on the dividend.
Bed Bath & Beyond is still generating billions of dollars in cash flow. With few opportunities in front of it, most of this cash will be funneled right back to shareholders. A few years out, BBBY stock could be the next cash cow for yield hogs.