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Alright Cato, I'll take my 4% dividend yield now



January 15, 2014 – Comments (0) | RELATED TICKERS: CATO , FRAN

Surely another blog post that will receive minimal attention, I'm gonna talk about a boring small cap women's retail company, Cato Fashions (CATO).  Cato operates discount women's retail clothing stores throughout the southeast, but also runs an up-and-coming accessories store called Versona.  As much as you'll read about weak comps and horrible month over month same store sales, Cato's operating cash flows over the past 4 years have been $80M, $81M, $80M, and through 3 quarters this year $77M.  For the most part, I ignore all the chatter about same store sales with this company.

Cato has a market cap of $800M, but current cash and equivalents total $230M.  Assuming that $30M is needed as operating cash (which is likely too conservative), we can calculate an enterprise value of $600M for Cato.

By subtracting the annual $20M in depreciation from the Operating Cash Flow, we're left with about $60M (or so) per year in Free Cash Flow.  CapEx has been a bit higher over the past few years due to expanding the Versona Brand, but the ROA on those stores is very high (use FRAN for a good comparison).  I really don't mind cash going toward that new retail brand.

So we're left with a company that has an enterprise value of $600M, and annual cash flows of around $60M - a 10% cash flow yielder.  But cash flows don't mean a whole lot if it isn't returned to shareholders in an effective manner.

After paying out a special dividend at the end of 2012 (essentially bumping up most of 2013's dividend payments), Cato hasn't paid out much to shareholders over the past year.  Now that 2013 is over, I'm expecting a nice little quarterly dividend of about $0.30 - good for a 4% yield.

I certainly don't think Cato is going to double over the next 5 years, but with the S&P 500 yielding less than 2% and trading at a P/E that's quickly creeping toward 20, I think Cato makes for a nice value addition to a portfolio.  And if the Versona concept continues to grow over the next couple of years, there is the possibility for some top line (and bottom line) growth too.

Google trends graph of Versona: 

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