Hold Big 5 Sporting Goods Stock For The Dividend (NASDAQ:BGFV)

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) is a national sporting goods retailer with 431 stores. It operates in a competitive environment. DICK’S Sporting Goods (DKS) is significantly larger with 858 branches. Walmart (WMT) and other major retailers offer many of the same types of items as the Big 5. Other physical and internet retailers compete in specific categories, including footwear, athletic apparel, ski gear, and camping gear.

The dividend of $0.25 will next be paid on September 15 to shareholders of record on September 1, 2022. This means that investors can earn a very high interest rate by buying shares in the rest of August. Whether this makes sense or not is discussed below.

In this article I will examine where Big 5 would or would not fit in portfolios. My own portfolio consisted mostly of small to mid-cap biotech stocks until about 2 years ago. While I mostly keep these companies, I’ve also added slower-growing, less risky dividend stocks. Big 5 is clearly a dividend stock, but it might not fit into every dividend-focused portfolio. Perhaps the most important question is whether the dividend is sustainable.

Big 5 results Q2 2022

Most retail stores are seasonal, and sporting goods have their own specific dynamics. The fourth quarter, which is such a big gift season for many retailers, is not the strongest of the Big 5. It coincides with the first sales of winter apparel and ski equipment. The first winter quarter also tends to be weaker. The second quarter is usually the busiest as spring forces people to venture outside with new clothes and gear. Then the third quarter eases off a bit as some summer sales continue followed by the addition of back to school sales including school sport sales.

To provide context, here are the Big 5 revenue results for the four quarters of 2021:

	BGFV revenue, million US dollars
Q1 2021	273
Q2 2021	326
Q3 2021	290
Q4 2021	273

click to enlarge

Big 5 reported revenue of $254 million for the second quarter of 2022 (fiscal year ended July 3), down 22% from $326 million in the same quarter last year. In fact, it has been below that in every quarter of 2021. Same-store sales were also down 22%, but the company noted that same-store sales are up 4% compared to two years ago. 2020 was a less-than-stellar year due to the pandemic, while 2021 was boosted by government stimulus controls.

After expenses, net income was $8.9 million, or $0.41 per share. That’s a significant decrease from the second quarter of 2021, when net income was $26.8 million, or $1.63 per share. Big 5 ended the quarter with $36.6 million in cash. It had no long-term debt, but it had $115 million in debt, $68 million in accruals and lease liabilities. On the plus side, it had $19 million in prepaid expenses, $14 million in accounts receivable, and $338 million in inventories.

Outlook after the pandemic

The price of any stock tends to be more about the future than the past. We know the past, but we suspect the future even when we use the word forecast. With the Federal Reserve raising interest rates and the likelihood that they will continue for a while, we could see consumer demand flattening or even a recession. Margins are now a crucial issue for retailers: how much will suppliers want to raise their prices and how much of that can they pass on to consumers? Margins were strong in the second quarter, 310 basis points higher than in the pre-pandemic second quarter, although they were down 102 basis points year-on-year. CEO Steve Miller reported that the Big 5 can use promotions strategically instead of eliminating excess low-margin inventory because inventory has been kept up to date. A focus remains on keeping costs down, which is a key to the company’s long-term success.

My expectation is that sales will normalize and that if the US enters a recession, it can pull itself out of it by cutting interest rates. I believe at some point gas prices will stagnate or even fall year-on-year, and at that point inflation will stop being an issue about as quickly as it became an issue. I don’t see any reason to expect a significant decrease or increase in Big 5 sales from current levels as long as the store count stays about the same. There is no reason to expect any significant expansion or contraction in the number of stores.

Sustainability of the dividend

While short-term dividend games are practiced by some investors, most of us want to know if a dividend rate is safe. Of course, no dividend can be guaranteed with certainty. However, Big 5 has a fairly stable retail model. For the second quarter, GAAP earnings per share were $0.41. That means since it’s currently paying $0.25 per quarter in dividends, that leaves $0.16 that can be reinvested in the company or accumulated as cash. The dividend results in a payout of about $5.5 million per quarter. With $36 million in cash on hand, the dividend could be paid from cash on hand rather than cash flow in a particularly weak quarter. Because of this, I think the dividend is safe and sustainable. With the stock closing at $13.49 on Aug. 15, 2022, that translates to a 7.55% annualized return. That’s a very nice dividend. My only caveat is that I don’t expect the Big 5 to grow significantly, so neither does the dividend. That might not do as well over the long term as a company that pays a dividend that can grow over time.

The stock has been quite volatile lately, with a 52-week low of $10.40 and a high of $46.30. This means that at the current price, while volatility is likely to continue, there is not much downside risk. With the stock scheduled to pay a dividend to shareholders of record on Sept. 1, purchases until then will yield an additional $0.25 per share fairly quickly if the price holds steady. Note, however, that stocks often fall by more than the dividend amount when they go ex-dividend. It’s best to decide based primarily on the longer-term dividend rate.

Conclusion

Even before the advent of the internet sales model, retail was a dynamic area for investment where the fittest survived. Big 5 has been around since 1988 and has survived in the highly competitive sporting goods sector. I shop there and have always found my local store to be clean, well stocked and with helpful (but not superfluous) staff. For those investors who are targeting dividends, understand the lack of growth model, and are diversified, I think Big 5 may be a good fit. As I add dividend stocks to my own portfolio, I added an initial slice of the Big 5 in late May and may add more over time.