3 High-Yield Retail Stocks With Attractive Valuations

As the threat of recession looms for 2022, investors have repositioned themselves in more defensive sectors of the market. One sector that is more aggressive, and therefore, has seen its constituents largely sold off in 2022, is retail. The sector is highly correlated to consumer discretionary activity, which declines during periods of economic weakness. Whether there is a recession 2022 or not remains to be seen, but what has already been seen is valuations in the retail sector plummeting. That, however, creates terrific opportunities in certain retail stocks, given the margin of safety of purchasing these companies has been improved by lower share prices. In addition, a lower share price -- in the absence of a dividend cut -- means a higher dividend yield. We will highlight three retail stocks we like not only for their high dividend yields, but also their valuations that drive high total expected returns in the years to come. Best Buy Our first stock is Best Buy , the widespread chain of technology stores that operates primarily in the U.S., but has a presence in Canada as well. Best Buy operates more than 1,100 big-box format stores that sell thousands of products from phones to appliances to audio equipment, and more. The company also has a services business that includes its popular Geek Squad team of technicians and technology advisors in stores. The company was founded in 1966, generates about $49 billion in annual revenue, and trades with a market capitalization of just over $16 billion. We see Best Buy as being able to produce 6% annual earnings-per-share growth off of 2022 levels, which would be much lower than historical trends. However, the growth the company has produced in the past decade was due in large part to earnings collapsing during the financial crisis. In addition, we see earnings as lower this year against 2021, which was an unusually good year as pent-up demand from Covid-19 saw surging consumer spending. However, we do believe that 2022 earnings will be the new base from which the next phase of growth begins. We see growth from the company's optimized store base, which has improved margins, as well as its years-long push to digital sales. That has helped Best Buy maintain top-line momentum, although growth can be lumpy due to quick shifts in consumer spending habits. Finally, Best Buy has reduced its share count meaningfully over the years, and we expect that to continue. Best Buy's competitive advantage is in its massive footprint, strong brand recognition, and value-added services such as Geek Squad, which competitors cannot replicate. We see total returns at 15.8% annually, driven by 6% projected growth, the ample 4.4% dividend yield, and a 6%+ tailwind from the valuation. The stock trades for just 8.9 times earnings, well below our estimate of fair value at 12 times earnings. Big Lots Our next stock is Big Lots , a home discount retailer that operates in the U.S. The company offers a wide array of merchandise categories across its 1,400+ stores, including furniture, seasonal items and decorations, beverages and groceries, health and beauty, and more. Big Lots was founded in 1967, generates just over $6 billion in annual revenue, and trades with a market capitalization of $773 million following pronounced weakness in the share price in 2022. The industry Big Lots competes in is quite competitive, given it is a reseller of goods from vendors that also sell their goods to other retailers. In other words, the assortment itself isn't necessarily an advantage. We see Big Lots as holding strong brand recognition with consumers on the margin, however, because it has a reputation of offering a no-frills, lower-priced shopping experience. During periods of economic weakness, retailers with a focus on value tend to do well. We see no growth ahead for Big Lots from 2022 levels because the company has struggled to grow for years. Its revenue is stagnant around $6 billion, and margins are at risk due to supply-chain and inflationary issues. However, the company has managed to buy back a substantial amount of stock, and that has helped. Still, we believe growth potential is quite low for the time being. Despite this, we see robust 13.3% total returns in the coming years, as the stock offers a 4% dividend yield at the moment, as well as a huge tailwind from the valuation. We see fair value at 10 times earnings, but shares trade at just 6 times earnings today, which we believe is far too low. Walgreens Boots Alliance Our final stock is Walgreens Boots Alliance , the ubiquitous pharmacy and retail company that operates a chain of about 9,000 stores in the U.S., as well as a further ~4,000 stores in the U.K., Thailand, Norway, Ireland, the Netherlands, Mexico, and Chile. Walgreens is heavily dependent upon its pharmacy business for revenue and earnings, but has a large traditional retail front-of-house as well. The company was founded in 1901, generates $130+ billion in annual revenue, and trades with a market capitalization of $36 billion. Walgreens has managed a long-term growth rate of about 7% in the past decade, which was driven by a combination of top-line growth, margin expansion, and share repurchases. We are slightly more cautious looking ahead, and instead see 5% projected growth. We see the company's business as quite stable for the long-term given its focus on its pharmacy, and share repurchases should keep a floor under earnings. The company's competitive advantage is in its name-brand recognition -- being the second member of a duopoly with rival CVS Health -- and its enormous scale. In addition, Walgreens should weather recessionary periods due to its reliance upon non-discretionary pharmacy revenue. We see total returns at 13.6% in the coming years, attributable to the 4.5% yield, 5% growth, and a tailwind from the valuation. The stock trades at just 7.9 times earnings, well under our estimate of fair value at 10 times earnings. Final Thoughts While weak periods in the stock market can be challenging to endure for investors, they can also create strong buying chances in high-quality names. Here we've outlined the bull case for three retail stocks that offer not only low valuations, but high dividend yields as well. We see the future as bright for all three -- for different reasons -- and believe investors that buy shares of Best Buy, Big Lots, and Walgreens today stand to generate strong returns in the years to come.

3 High-Yield Retail Stocks With Attractive Valuations

Here's the bull case for three retail stocks that offer low valuations and high dividend yields.

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