MisterValuation Featured Dividend Income Stock of the Week: Kohl’s Corp

2015-10-23

Introduction

In my quest to provide greater benefit to MisterValuation subscribers, I am continuously looking for ways to improve your experience and profit.  Therefore, this will be the second in an ongoing series of featured stocks of the week.  Currently, I have come up with three categories:

  1. Dividend Growth: In this category I will be featuring fairly valued dividend growth stocks with the potential to generate above-average future long-term total returns.  With this category my emphasis will be on growth of earnings and dividends.  Of course, as I will with all categories, my primary focus will always be on fair or attractive valuation.
  2. Dividend Income: In this category I will be featuring fairly valued dividend paying stocks for above-average current income.  With this category my emphasis will be on current yield with the potential for growth yield.  This category will primarily feature blue-chip dividend-paying stalwarts and select REITs.
  3. Growth Stocks: In this category I will be featuring fairly valued high-growth stocks.  With this category my primary emphasis will be on high expected future earnings growth potential available at valuations aligned with that growth potential.  Most of the stocks in this category will lack the dividend component; however, there may be a few growth stock selections that do pay a small dividend.

Since this website was created to serve subscribers, feedback and suggestions are appreciated and welcomed.  I can’t promise to institute each and every recommendation, however, I can promise to try my best.

Dividend Income

The MisterValuation featured stock of this week will be in the “Dividend Income” category.  The primary difference between this category and the “Dividend Growth” category is the focus on income more than capital appreciation or growth.  Companies featured in this category are directed to those investors, retired or otherwise, who are in need of or desirous of maximum current income at reasonable levels of risk.

Secondarily, the dividend income category will be more focused on safety and dividend sustainability than capital appreciation or total return.  As I discussed in my recent article on IBM, when it comes to determining the safety associated with investing in a stock, determining whether it possesses superior financial strength is an obvious and commonly-utilized approach.  However, there are additional important safety measurements that are more subtle, less understood and often either ignored or their importance not given the credit deserved.

These more subtle safety measurements are an above-average, but sustainable, current dividend yield and sound valuation, or better yet, significant undervaluation.  My featured dividend income stock of the week is Kohl’s Corp (KSS), and very importantly, it was chosen based on the sustainability of its dividend and high current yield, coupled with what I believe is significant current undervaluation.

I want subscribers to clearly understand that Kohl’s Corp does not possess the blue-chip status of a Johnson & Johnson or Procter & Gamble, etc. However, I do believe that Kohl’s is a high quality and high current yielding dividend growth stock.  But its primary safety characteristic today is its extremely low valuation.  There are many ways to define risk, and many ways to mitigate it.  In my opinion and long experience, extreme undervaluation is a great way to reduce the risk associated with investing in equities.

Additionally, extreme undervaluation comes with a very powerful twist.  Conventional wisdom suggests that in order to achieve higher returns you must take on greater risk.  Conversely, conventional wisdom also suggests that low risk investments should not be expected to generate higher future total returns.  Extreme undervaluation represents an exception to that rule of thumb.

When you can identify a fundamentally sound company at an extreme level of undervaluation, your downside risk is lessened, because it is already in the low price.  But equally as important, the low valuation provides the opportunity for significantly higher future long-term returns through P/E ratio expansion potential as an accelerator of return.

Important Caveat on Value Investing

My last featured dividend growth stock of the week was on Polaris Industries (PII).  Subsequent to the time the article was published, the company had fallen approximately 10%, but has recovered somewhat since then.  This caused some concern for one subscriber who commented about it in the forum.  It was a legitimate concern, and therefore, I provided a lengthy response that I will share for anyone who didn’t read the forum comment in a moment.

However, before I do that, I want to take this opportunity to point out that this MisterValuation website is dedicated to long-term value investing.  I want it to be clear that I will never present short-term trading opportunities.  It is simply not in my nature, because I am a strong believer that short-term timing of the market is virtually impossible.  Consequently, all of my suggestions are presented as research candidates – not picks or hot stock tips.  Additionally, they are all presented as fairly valued or undervalued opportunities to position yourself as long-term shareholders/owners of businesses.  With that said, my forum response was as follows:

“Thanks for your comment and the opportunity it inspires to clarify some important points about value investing. First and foremost, value investing is a strategy that is most appropriate for long-term oriented investors. The long-term opportunity to invest in a great and growing business such as Polaris Industries (PII) is substantial. Moreover, sound valuation means having a firm foundation of fundamental strength supporting your position.

However, there is always a short-term dark side associated with being a value investor. This is especially true when the value investor uncovers a significantly undervalued opportunity. Almost by definition, a stock does not become undervalued unless it is out-of-favor in the marketplace. When a stock goes out-of-favor, short-term oriented traders are selling. The more they sell, the further a stock can drop. This can continue for some time until the selling stops. Unfortunately, there is no way to precisely predict when that might occur because it is primarily an emotional response.

Warren Buffett once succinctly illustrated this by stating that you cannot buy what’s popular and expect to do well. Polaris Industries has clearly been an unpopular stock since the beginning of this year. Check out your F.A.S.T. Graphs™ and you’ll see what I’m suggesting.

Consequently, and once again, over the shorter run a stock can continue to fall, and as it does, if the fundamentals are intact, it becomes more and more undervalued. As the old saying goes, they do not ring a bell at the top or bottom of a market. Therefore, it is not only possible, but very likely, that you can make a great purchase of a super company that is undervalued and still watch the price continue to drop to lower levels before it inevitably turns around. The inevitable part comes when fundamentals support a higher value.”

Kohl’s Corp: High Yield Dividend Income Stock of the Week

Kohl’s Corp is a relatively new entrant into the dividend income stock category.  The company paid its first dividend in 2011, prior to that, Kohl’s was primarily a mid-cap growth stock.  In concert with many retailers, the stock has been under extreme pressure in 2015.  Consequently, I believe the company is currently extremely undervalued relative to its fundamentals and fundamental strength.

Kohl’s can currently be purchased at a blended P/E ratio of approximately 10, and offers a 4% current dividend yield.  Following a huge dividend increase in 2012 from $.25 to $1 per share, the company’s dividend has continued to grow at over 18% per annum.  For those not familiar with the company, I offer the following short business descriptions courtesy of S&P Capital IQ and MorningStar:

“Kohl’s Corporation operates department stores in the United States. It offers private label, exclusive, and national brand apparel, footwear, accessories, beauty, and home products to children, men, and women customers. The company also sells its products online at Kohls.com and through mobile devices. As of March 03, 2015, it operated 1,162 department stores in 49 states Kohl’s Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin.”

“Profile: 

Kohl’s is an American broadlines retailer with a focus on the five strategic pillars of product, savings, easy experience, personalized connections, and teams. Kohl’s operates 1,164 stores in addition to an e-commerce platform offering about 50% national branded product and 50% private or exclusive.”

The following analyze-out-loud video will illustrate my rationale for suggesting Kohl’s Corp as a high current yield and extremely undervalued research candidate opportunity.

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