Seeking out businesses with solid growth potential is a popular investing strategy, and this approach can be especially valuable when the business model has been tested and proven over a period of decades.
Since its formation in 1982, Ross Stores (ROST -0.59%) has grown into a giant of the off-price retail industry. That's why a $5,000 investment in the company made 10 years ago would now be valued at $19,840 with dividends reinvested. That performance handily beat the S&P 500 over the same period.
But after such a strong run, is the retailer still a buy for dividend investors also looking for strong capital appreciation? Let's assess Ross Stores' fundamentals and valuation to find out.
Customers are leaning in on the company's great deals
Selling unique apparel and home goods at 20% to 70% off department store prices has been a winning formula for Ross Stores. The company can draw customers in with a balance of appealing merchandise at prices that people like in a prosperous economy and especially love in a challenging economy.
The logistics behind this business require mutually beneficial relationships with vendors and more modest sales displays (no decorations or flashy fixtures). Ross purchases merchandise from vendors at heavily discounted prices, clearing out high volumes of inventory for these vendors in the process.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Comparable store sales growth rate | (7%) | 5% |
| Total store count | 1,980 | 2,061 |
| Net margin | 8.4% | 9.0% |
Data source: Ross Stores.
Ross' sales jumped 7.7% year over year to $4.9 billion during the fiscal 2023 second quarter (ended July 29). The company was able to secure merchandise at exceptionally favorable prices, and this led to increased foot traffic, which drove the 5% comparable sales growth.
Ross' diluted earnings per share (EPS) were up 18.9% year over year to $1.32 in the quarter. While the rise in total costs and expenses did trail sales growth, the company's net margin gain was also supported by management's ongoing stock buybacks. Ross repurchased 2.2 million shares in the fiscal second quarter for $230 million with plans to repurchase $950 million of stock in the full fiscal year.
As Ross builds on its network of stores and reduces its share count, earnings per share should climb steadily. Analysts believe Ross Stores can grow earnings 11.6% annually over the next five years.
Image source: Getty Images.
Healthy dividend growth can be sustained
Ross' 1.1% dividend yield probably won't stand out to income investors as it lags the 1.6% yield of the S&P 500. However, the company shines with dividend growth: Ross has grown its quarterly dividend per share nearly 50% in the last five years.
Data by YCharts.
And similar dividend growth should persist for the foreseeable future given the company's low dividend payout ratio of 28%. This leaves the company with more than enough funds to cover additional growth opportunities, debt repayment, share repurchases, and further dividend raises.
Fairly valued near its 52-week high
After having rallied 41% in the past 12 months, shares of Ross Stores are sitting right at their 52-week high. Yet, the stock's forward price-to-earnings (P/E) ratio of 21.2 isn't far off the apparel retail industry average of 19.7. Given Ross' status as one of the most dominant off-price retailers, this small premium is arguably justified, and the stock can be a solid buy for dividend-growth investors.
