It is rare for a Dividend Aristocrat to cut or suspend its dividend. The companies on this list have paid dividends for over 25 years. Further, they need to meet minimum capitalization and trading volume requirements. The companies tend to have survived several recessions. Hence, the companies are conservatively run from the perspective of capital allocation. This tends to make the dividend more sustainable during economic downturns. As dividend growth investors trying to reach financial independence we are all concerned with dividend safety. However, on occasion one of these companies does cut or suspend its dividend during recessions. Ross Stores (ROST) is a Dividend Aristocrat that has suspended its dividend. However, due to the low yield and recent addition to the list, it is unlikely that many dividend growth investors will be impacted by this dividend suspension.
Overview of Ross Stores
Ross Stores was founded in 1982 in California. The company is a off-price retailer that sells apparel, accessories, footwear, and home fashion. It two major stores brands are Ross Dress for Less and dd’s DISCOUNTS. AT end of first quarter, Ross had about 1,831 stores and operated in 39 states, Washington DC, and Guam. Total revenue in 2019 was $16,039 million.
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What are Dividend Aristocrats?
Dividend Aristocrats are U.S. stocks in the S&P 500 index that have raised their dividend for 25+ consecutive years. A stock must meet the following criteria to be included in the list of Dividend Aristocrats.
- Be a member of the S&P 500
- Have raised the regular dividend per share for 25 consecutive years
- Have a market capitalization of at least $3 billion
- Average at least $5 million in daily share trading value for the past three months
A Dividend Aristocrat can also be a Dividend King and a Dividend Champion. Currently, there are only 66 constituents including Ross Stores on the list. Ross Stores has not yet been deleted from the list as of this writing. The only other retailers on the Dividend Aristocrat list are Target (TGT), Wal-Mart (WMT), and Lowe’s (LOW).
Ross Stores Suspended Its Dividend
Ross Stores has paid a growing dividend for 25 years making it a recent addition to the Dividend Aristocrat and Dividend Champion lists. In fact, Ross just joined the list in January 2020.
The company had just announced another raise to the quarterly dividend in early-March. Before the dividend suspension, the forward annual regular cash dividend was $1.14 per share. Prior to the suspension the dividend yield was about 1.2%. The yield was not too high, so in my opinion it was not signaling a cut.
Further, the dividend was seemingly well covered by earnings with a payout ratio of only about 25%. Cash flow was also not an issue at least prior to COVID-19. In fiscal 2019, operating cash flow was roughly $2,172 million. Capital expenditures were $555 million. This gives free cash flow of $1,617 million. The dividend required only about $368 million giving a dividend-to-FCF ratio of only 22.8%. This is an excellent value from the perspective of dividend safety.
But still the impact of COVID-19 on Ross Stores was probably more severe than expected. The company missed the already lowered Q1 2020 estimates by a wide margin. Revenue came in at $1.84 billion or a (-51.5% year-over-year) decrease. This was $200 million lower than estimated. Diluted GAAP earnings per share were -$0.87, which missed by $0.86 per share. The magnitude of these misses indicate that it was very difficult to forecast revenue and earnings for retailers during the pandemic. So, in the end, it is not surprising that the dividend was suspended by Ross.
Specifically, in the press release, the company CEO, Barbara Rentler, stated:
In response to the economic disruption created by this global health crisis, we quickly took decisive actions to increase our liquidity and financial flexibility. These included drawing down $800 million under our revolving credit facility, completing a $2.0 billion public bond offering, suspending our stock repurchase program, and aggressively cutting costs throughout the Company, including ongoing expenses and capital expenditures. Today we are announcing several additional actions, which include the suspension of our quarterly dividend program and reduced new store openings for the year.
From the transcript of the conference call, the CFO said:
In addition, we also announced today the suspension of our quarterly dividend payments. We are also aggressively cutting costs throughout the company by minimizing non-business critical operating expenses, rightsizing our merchandise receipt and inventory plans and reducing capital expenditures to further enhance our liquidity.
Impact of COVID-19 on Ross Stores
It is probably not unexpected that Ross Stores suspended its dividend. COVID-19 has hit retailers that do not sell consumer staples or basic necessities hard. Ross Stores is no exception. The company closed all its store locations on March 20th, 2020 in response to the spread of COVID-19 pandemic. This included all 1,565 Ross Dress for Less stores and all 266 dd’s DISCOUNTS. At the time, the company had closed many stores or reduced store hours due to government directives. Ultimately, it was probably easier to close all the stores similar to its competitors. Sales had likely dropped dramatically so closing stores and reducing labor costs would reduce cash flow requirements maintaining liquidity on the balance sheet.
The company also withdrew FY 2020 sales and earnings guidance at nearly the same time. Notably, the company had issued FY 2020 guidance on March 3rd, 2020. So, in the span of about two weeks the company experienced rapid deceleration of sales due to mandatory closures and ‘social distancing’. Eventually, on March 26th, 2020, Ross Stores canceled merchandising purchase orders through June 18th and extended payment terms due to the pandemic.
Ross Stores is Preserving Liquidity
Ross Stores is doing pretty much what every other company is trying to do at the moment and that is preserve liquidity and raise cash for the balance sheet. As stated above, The company canceled orders and extended payment terms to preserve cash on the balance sheet. The company is cutting capital expenditures to $420 million from its initial guidance of $730 million.
The company suspended share repurchases and suspended the dividend. For the quarter, this will save about $330 – $340 million in cash based on fiscal 2019 share buybacks. It will also save roughly $100 million in cash by not paying the dividend for one quarter. However, Ross may need to suspend the dividend for more than none quarter depending on how quickly the economy recovers.
Ross Stores also drew down $800 million on its revolving credit facility and obtained a new $500 million undrawn revolving credit facility. Further, the company issued a $2 billion senior unsecured public bond offering.
At the end of Q1 2020, Ross Stores had about $2.7 billion in cash on the balance sheet and $500 million in the new revolver. Clearly, Ross Stores will need this money to ramp up its operations to pay its employees and order merchandise.
Will Ross Stores Reinstate the Dividend?
The question on the mind of many dividend growth investors is likely, “Will Ross Stores Reinstate the Dividend?” The official answer from the company CFO is:
In terms of reinstating the dividend, again, I think what’s critical is that we’re going to have to have a much greater visibility on what the sales trend is, what the sustainability of those trends are and factor that in relation to the needs of the business over both the short and the long-term. And so there are a number of factors that we’re going to look at before we would consider reinstating the dividend.
So, from my perspective, the company seemingly wants to reinstate the dividend. However, the timing is uncertain. This is because Ross’ management probably does not have good visibility on sales and earnings for the second and even the third quarter. I expect that it will be late-2020 or even into 2021 before Ross Stores’ operations return to a more ‘normal’ footing.
Final Thoughts on Ross Stores Suspended Its Dividend
Ross Stores is a well-run company in my opinion. It was a dividend growth stock albeit one with low yield. Management returned more cash through stock buybacks than dividends. With that said, the good dividend safety metrics meant that the dividend was sustainable in ‘normal’ times. But as we well know, these are atypical times. Hence, Ross Stores suspended its dividend.
I think that it is more probable that Ross will reinstate the dividend at a lower level than before. It is not realistic to expect that retail sales will return to where they were a few months ago in the near future. I also think that Ross will not make up the dividend suspension. That would delete the company from the Dividend Aristocrat list. The company would need another 25 years of consecutive dividend increases before being added to the list again.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.