Now that the Fed has officially delayed the interest-rate hike and all the bright guys are suggesting no hike until next year, income-oriented investors are faced with the same levels as the past few years -- with no end in sight. I do not see that interest rates will get any better for an extended period of time. There just is not enough strength in the economy, and I do not see any developing anytime soon. We are not going to get any help from the rest of the world -- as weak as our economy appears to be, it is the best of a very bad bunch. I won't try to predict that path of rates, but it is going to take one big surprise to get rates up to a level where fixed-income and bank-savings products are a viable alternative for income-starved investors.
That leaves investors turning towards the stock market, which has its own special sets of risks. It doesn't help that we have had a 6-year bull market that has seen stock prices triple off the lows. Bargains are thin on the ground, and the majority of blue-chip dividend stocks are on the verge of being ridiculously overpriced, given their single-digit growth prospects. Wall Street is working day and night to come up with new products -- with great stories and high fees -- to meet this still-surging demand for income-oriented investments. As compassionate as this may seem, I have rarely seen these "exciting and interesting" retail endeavors from the Street work out very well for retail investors.
Investors are probably best to rely on old-fashioned value investing with a tilt towards dividend-paying companies with a solid history of raising their payouts over time. When I ran a screen looking for some candidates, this morning, I found several dividend-growth stocks trading below book value that are worth considering for a long-term dividend-paying portfolio.
Stage Stores (SSI) has shown up in every screen I have run, in recent weeks. After falling short of Wall Street expectations, the shares of sold off sharply and now trade at just 72% of tangible book value. After reviewing the conference call, I like what management had to say and the reasons they are embarking on a plan to close underperforming stores. On the call, CFO Oded Shein talked about the store closings, saying, "We conducted a strategic assessment of our real-estate portfolio. In the past, a store that generated four-wall contribution greater than zero was considered viable. That is no longer the case. We are raising the bar. Our assessment identified stores that do not have the potential to meet our increased sales productivity and profitability benchmarks. We expect to close approximately 90 such stores -- with 27 closing in 2015 and the majority closing by the end of fiscal 2017." The closings should markedly improve overall performance metrics.
Stage Stores has raised its dividend by an average of 22% a year over the past 5 years, and just raised it again in August from $0.14 a share to $0.15 per quarter. The company has an F-score of 7 and a Z-score of over 3, so there appears to be a margin of safety in the balance sheet with this company. At the current price, the stock yields 5.64% so it is definitely a good fit for an income portfolio.
CEO Michael Glazer has guided down for the rest of the year. They have stores in Texas, Louisiana, Oklahoma and New Mexico that are feeling the pinch of lower oil prices in the local economy. They also have 27 stores along the Mexican border that are feeling the pinch of the stronger dollar. The lowered guidance is still for $1.05 to $1.15, so the stock is cheap on an earnings basis, as well.
Stage Stores has a portfolio of store brands in small and mid-sized communities. One of their brands, Bealls is just up the street from me, and I do shop there because they have some particular brands of shoes and shirts that I favor. However, I am far from a retail expert as my average shopping trip takes about 10 minutes -- as long as the checkout line is not too long. But I do have an extensive network of field agents for retail investigation -- two daughters and a wife. When the wife went shopping for an outfit for our anniversary dinner, this weekend, she came home with several new items from Bealls.
She pays no attention to stocks or the market, so she had no idea I was even considering the stock and probably does not even know they are owned by Stage Stores. When I asked why she picked that store, she told me that they always seem to have the items and brands she wants at better prices than the more upscale shops.
The experts have spoken. I will be buying the stock on the next down day.