Small, off-the-radar fashion retailer Cato Corp. (CATO) had a solid day last Friday, rising nearly 9%. That move put the stock at a 20-month high and was driven by a 55% hike in the quarterly dividend, from 11 cents to 17 cents, which equates to a 3.76% indicated yield.
The dividend action was not unexpected for a couple reasons.
First, Cato historically has returned a significant amount of cash to shareholders, and not just through cash dividends (more on that later). Pre-pandemic, the quarterly dividend was a healthy 33 cents a share. It was suspended after the March 2020 payout given COVID uncertainty and returned this past June at 11 cents.
Second, Cato has the cash to increase the payout. The company ended its latest quarter with $217 million, or nearly $10 per share, in cash and short-term investments. That a considerable amount considering Cato's current market cap is around $400 million and the stock price is around $18. In addition, the company has no debt.
The market obviously liked Friday's dividend news, but there is a bit more to this story. As I've mentioned multiple times in past columns on Cato, the company historically has used share buybacks to return cash to shareholders. Between year-end 2014 and the latest quarter that ended July 31, Cato has repurchased nearly 26% of its shares outstanding.
We now know that buybacks have continued this year. During the second quarter Cato repurchased 64,709 shares for nearly $1.05 million, or $16.18 a share. For the first six months of this fiscal year, Cato bought back 490,370 shares for $6.48 million or $13.22 a share. Between July 31 (the end of its fiscal second quarter) and Aug. 27 (when the 10-Q was released), Cato bought back another 168,390 shares. That's a total of nearly 659.000 shares repurchased in the past seven months. As of July 31, the company still had another 1.38 million shares remaining on its current repurchase authorization; backing out purchases made subsequent to the quarter's end still leaves 1.21 million shares available for repurchase.
The combination of dividend increases and stock buybacks can be powerful. It shows that management has confidence in its business, confidence that its shares are undervalued, and that business is solid enough to raise cash payouts. All for a stock that still garners no analyst coverage.