Best Buy Raises Dividend – Analyst Blog

Best Buy Company Inc. (BBY), the leading specialty retailer of consumer electronic products, recently boosted its quarterly dividend by 7.1%. The board has approved an increase in annual dividend to 60 cents (or 15 cents quarterly) from 56 cents a share (or 14 cents quarterly).

 

The increased dividend will be paid on October 26, 2010 to stockholders of record as on October 5, 2010. The company initiated its regular quarterly dividend in fiscal 2004. The last paid quarterly dividend of 14 cents represented an increase of 8% year-on-year.

 

Best Buy’s current annualized dividend yield of 1.6% is higher than that of the Industry’s, which stands at 1.4%.

 

The dividend hike is primarily supported by Best Buy’s strong balance sheet and its ability to generate a healthy cash flow. The company ended the quarter with cash and cash equivalents of $1,239 million, and total long-term debt of $1,287 million, reflecting a debt-to-capitalization ratio of 15.5%.

 

The company also resumed its share repurchase program in the first-quarter 2011, after suspending it in the last two fiscal years, when the economy faltered. Best Buy bought back 2.5 million of its shares during the quarter.

 

With signs of recovery in the economy, share repurchases and dividend increases have now become common among companies sitting on surplus cash. These strategies not only enhance shareholders’ return, but also boost earnings per share and raise the market value of the outstanding shares.

 

The dominant position in the consumer electronic business enables Best Buy to sustain growth in the top line, expand its store base, and boost its market. The company increased its market share domestically by 1% in the first-quarter 2011. The stores tailor their store merchandising, staffing, marketing and presentation to meet the distinct needs of targeted customers. Best Buy has also been actively managing its capital and making prudent capital expenditures.

 

However, the company sells products that are more discretionary in nature rather than necessities. Therefore, Best Buy runs the risk of sluggish consumer demand for big ticket discretionary products and price deflation.

 

Best Buy maintains a Zacks Rank #3, which translates into a short-term ‘Hold’ recommendation, and is in line with our long-term Neutral recommendation for the stock.