Published by Bob Ciura on June 8th, 2017
Tiffany & Co. (TIF) customers know the company for its famous blue boxes. Investors should come to know the company, for its high dividend growth.
Tiffany stock has a mix of a long history of dividend growth, coupled with a high dividend growth rate. It typically increases its dividend by 10% or more each year.
On May 25th, Tiffany increased its dividend by 11%. It has raised its dividend for the past 15 years.
This makes Tiffany a Dividend Achiever, a group of 265 stocks with 10+ years of consecutive dividend increases.
This article will discuss Tiffany’s business model, and why it could be an attractive stock for dividend growth.
Tiffany was founded all the way back in 1837. It is a jeweler and specialty retailer. It has a wide range of merchandise offerings, including jewelry, timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories.
The company’s main focus is jewelry, which accounted for 92% of worldwide net sales in fiscal 2016.
Tiffany has a significant international presence. More than half of its sales come from outside the U.S.
It generates revenue from the following countries:
- Americas (46% of 2016 revenue)
- Asia-Pacific (25% of 2016 revenue)
- Japan (15% of 2016 revenue)
- Europe (11% of 2016 revenue)
- Other (3% of 2016 revenue)
The ‘other’ segment includes retail sales and wholesale distribution in the emerging markets, wholesale diamond sales, and licensing agreements.
In terms of product category, Tiffany’s sales are as follows:
Source: 2016 Annual Report, page 14
2016 was a challenging year for Tiffany, due to softness in most of its core geographic regions. Worldwide sales of $4 billion represented a 3% decline from the previous year.
Comparable-store sales, a key performance metric for retailers, which measures sales at stores open at least one year, declined 5% for the year.
Adjusted earnings-per-share fell 2% to $3.75, as sales declines were somewhat offset by cost cuts.
Tiffany performed poorly last year, but the company has targeted several promising initiatives to restore growth.
Put simply, Tiffany management believes its lackluster performance last year was the result of the company losing its connection with consumers.
To polish its image and refresh its standing among its core customers, Tiffany employed a number of initiatives to return to growth.
First, it introduced a number of new products last year across a wide range of materials and price points, such as jewelry crafted in diamonds and platinum, new designs in gold and sterling silver, and an expanded portfolio of watches.
In addition, the company revamped its marketing campaign, to more effectively reach its target demographics. Tiffany invested more heavily in digital and social media last year, and also aired its first Super Bowl commercial.
The company has a significant e-commerce businesses. Its e-commerce websites operate in 13 countries, and e-commerce sales accounted for 6% of total sales last year.
One of Tiffany’s growth catalysts is the redevelopment of existing stores, as well as opening new ones. The company made progress in 2016, by opening 11 new stores, relocating five, and closing five under-performing stores.
These efforts have already paid off. Tiffany returned to revenue growth in the first quarter, with a 1% year-over-year sales increase.
Growth in Asia-Pacific and in wholesale diamond sales boosted Tiffany’s results last quarter. Excluding the impact of currency fluctuations, sales rose 2% year over year.
Earnings-per-share increased 7.2% year-over-year.
The company expects its turnaround initiatives to restore higher levels of sales growth over the long term. Continued cost discipline will help maintain earnings growth in the mid-to-high single digits.
Competitive Advantages & Recession Performance
Tiffany’s major competitive advantage is its brand. Tiffany is the leading jewelry brand. Over its many decades in operation, consumers have come to associate Tiffany with sophistication, elegance, and luxury.
Its brand strength provides the company with pricing power. And, its global scale allows the company to cut costs when necessary, without impacting business operations.
Tiffany’s highly profitable business model provides the company with the necessary resources to advertise. High levels of advertising help cement Tiffany’s brand image with consumers.
The company spent $299 million, or 7.5% of worldwide net sales, on advertising in 2016.
Tiffany’s earnings-per-share fell during the 2008-2009 recession, but only mildly, and quickly recovered afterwards. Plus, Tiffany still remained highly profitable during the Great Recession:
- 2007 earnings-per-share of $2.33
- 2008 earnings-per-share of $2.12
- 2009 earnings-per-share of $2.93
- 2010 earnings-per-share of $3.61
After a modest dip in 2008, Tiffany returned to high growth rates the following year, and thereafter.
Valuation & Expected Total Returns
Tiffany stock trades for a price-to-earnings ratio of 25.6, which is nearly on-par with the S&P 500 Index. As a result, the shares seem fairly valued or slightly undervalued, given the company’s growth potential.
Assuming the stock is fairly valued, investors should not expect the valuation multiple to expand significantly from here. That said, Tiffany is likely to generate satisfactory returns moving forward, due to earnings growth and dividends.
A reasonable breakdown of total returns could be as follows:
- 4%-6% revenue growth
- 1% margin improvement
- 1% growth from share repurchases
- 2% dividend yield
Therefore, investors can reasonably expect total returns of approximately 8%-10% per year, on average.
Tiffany’s recent dividend hike takes its annualized payout up to $2.00 per share. It has now come through with 16 dividend increases in the past 15 years.
Source: Investor Relations
Going forward, Tiffany has a dividend yield of 2.2%. This is slightly higher than the average dividend yield of the S&P 500 Index.
Based on 2016 adjusted earnings-per-share, Tiffany had a dividend payout ratio of 53% last year. This is a very comfortable ratio, and leaves plenty of room for continued dividend growth.
As a result, investors can expect Tiffany to raise its dividend by 10% each year, going forward.
This is a difficult time for Tiffany, but it is likely a short-term deterioration. The company is still growing earnings.
And, Tiffany is one of the few retailers that appears to be immune to the threat of Internet retailers such as Amazon.com (AMZN). That is, of course, unless consumers start purchasing expensive, high-end jewelry online—which seems unlikely.
As a result, investors interested in a secure dividend with high growth potential, should take a closer look at Tiffany.