You Won't Sleep Easy With Bed Bath & Beyond

Stocks with high dividend yields have great appeal for income investors. But not all high-yield stocks are worthy of investment. Stocks might have a high dividend yield, because their stock price has collapsed, which is a sign of trouble. An example of this is retailer Bed Bath & Beyond , which sports a dividend yield above 6%. But that is largely because the share price has declined 44% in the past one year. Investors fear the retailer is quickly losing ground in an era increasingly dominated by e-commerce giants such as Amazon . Bed Bath & Beyond has continued to increase its dividend, including a recent hike in April. But investors should not buy Bed Bath & Beyond simply because of its dividend yield; focus instead on the company's financials, which are struggling. Business Overview and Recent Events Bed Bath & Beyond is a diversified retailer with multiple brands, including its namesake Bed Bath & Beyond store, along with Christmas Tree Shops, Harmon, buybuy BABY, and World Market. As of June 1, the company had 1,536 stores across 50 states, the District of Columbia, Puerto Rico and Canada, including 995 Bed Bath & Beyond stores. The past year has been very difficult for Bed Bath & Beyond. As a major brick-and-mortar retailer, it has struggled to adapt to changing consumer preferences. Specifically, physical retailers with a reliance on malls, such as Bed Bath & Beyond, were too slow to react to the onslaught of Internet retail competition. Put simply, consumers love the convenience of shopping from home, often finding better deals than brick-and-mortar retailers can offer. The result has been a wave of store closures and bankruptcies across the retail industry over the past few years. The trend does not appear to be reversing any time soon, which means physical retailers must either launch e-commerce platforms of their own. Few have had success in this area thus far, as Amazon offers continues to dominate. Bed Bath & Beyond has resorted to steep discounting to maintain traffic, including an aggressive coupon strategy, but this has simply lowered its profit margins in an already low-margin industry. Bed Bath & Beyond on July 10 reported fiscal first quarter 2019 results for the period ending June 1. For the quarter Bed Bath & Beyond recorded sales of $2.57 billion, representing a 6.6% decline compared to the first quarter of 2018. The company also reported a net loss of $371 million, or $2.91 per share, due to non-cash goodwill and intangible charges, along with severance and other costs. Excluding these items would have resulted in adjusted earnings per share of 12 cents, a 68% decline from the same quarter last year. Attractive Dividend, But For How Long? Despite its falling sales, Bed Bath & Beyond remains profitable enough to pay a generous dividend to shareholders. Bed Bath & Beyond expects to generate adjusted EPS in a range of $2.11 to $2.20 per share for 2019, excluding impairment, severance and shareholder costs. At the same time, the company raised its dividend by 6% in April, to the current level of 68 cents per share. The current payout represents a yield of over 6% right now, making Bed Bath & Beyond a fairly attractive stock for income investors. The dividend appears secure, as the company's projected dividend payout ratio for 2019 is a modest 31.5%, using the midpoint of full-year EPS guidance. However, the long-term sustainability of the dividend could be in question if Bed Bath & Beyond does not reverse its troubling fundamental deterioration. So far, management has been unable to stem the tide of falling sales and collapsing profits. The significant decline in the stock price is an indication that the market is not convinced the company's turnaround will be successful. The company has run into severe challenges in recent years. Bed Bath & Beyond's EPS hit a peak of $5.10 in 2015, but have fallen every year since. The company sunk to a net loss last year, only posting positive EPS on an adjusted basis. Rather than take e-commerce retailers like Amazon head on, for several years Bed Bath & Beyond management kept earnings per share afloat with aggressive share buybacks. Bed Bath & Beyond's share count declined 37% between 2012 and 2017. But this strategy proved disastrous. In the 2012 through 2016 stretch, the company spent $6.9 billion on buybacks -- an amount that is almost five times the current market cap of the stock. An excessive amount was wasted on buybacks whereas it could have been used to support the business by investing in growth strategies. The company has had to play catch up since. It is spending huge amounts to improve its online sales, remodel its stores, test market personalization tactics and optimize its supply chain to reduce operating costs. Still, Amazon is only gaining in popularity, and it is not yet certain whether Bed Bath & Beyond can turn itself around. Final Thoughts Bed Bath & Beyond has an extremely attractive dividend yield above 6%. And, the company continues to raise its dividend. With a dividend payout ratio below 40% expected for 2019, on the surface Bed Bath & Beyond seems to be a clear buy for dividend growth investors. But the metrics that make the stock look attractive today, could change in the future. Underneath the surface, the company's fundamentals are deteriorating. Trends are changing, and Bed Bath & Beyond has not adapted quickly enough. While Bed Bath & Beyond shares look attractive for income, only investors with a high tolerance for risk should consider buying the stock. Amazon is a holding in Jim Cramer's Action Alerts PLUS member club.

You Won't Sleep Easy With Bed Bath & Beyond

Despite an extremely attractive dividend yield above 6%, BBBY comes with lots of risk.

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