Manly Stock Wars: The Men’s Wearhouse vs. Dick’s Sporting Goods

Published Thu, Dec 13th, 2012   Louis Basenese, Chief Income Strategist

Last month, I put my nose to the grindstone and answered some of your most pressing questions…

One reader, J.N., asked, “Why are you only going to do the Dividend Stock Wars once per month? How about once per week?”

Like I said then, “conducting the research for each battle takes considerable time. But we’ll see if we can hire some cheap interns to help us up the frequency.”

Well, you’re in luck, J.N.

It might be that D&I Daily landed a glut of eager, unemployed college students.  Or maybe I just felt inspired when Manny Pacquiáo said, “There will be future fights.”

Either way, we’ve cleared the arena for another round of Dividend Stock Wars.

But this time, we’re not pulling any punches. Instead of just a single skirmish between two opponents, it’s going to be an extended brawl, battle royale-style.

Six dividend payers, three head-to-head matches, and a final standoff to determine the ultimate dividend winner.

And if that’s not burly enough, we’ve brought it all together under a single theme: Manly Stocks. Think big-game hunting, heavy machinery and excessive horsepower.

Here’s the breakdown of contenders…

But before we let the games begin…

Rules of Engagement

As many of you already know, the concept of a stock war couldn’t be simpler.

We pit two companies against one another and conduct a blow-by-blow fundamental comparison of each to determine the most investment-worthy one.

Armed with the analysis, you can then consider buying the winner – or both, if it’s a close matchup.

But remember, we’re in for the long haul on this one with six potential winners, so we recommend waiting until the final matchup is over before taking action.

So without further ado, let’s start the first match, using our seven guiding principles of dividend investing – plus one more critical fundamental (valuation) – to determine whether The Men’s Wearhouse (MW) or Dick’s Sporting Goods (DKS) is the more compelling income investment right now…

~ Round 1: Simple Business

We’re with Warren Buffett on this one: If you can’t understand it, don’t invest in it. This holds especially true for income investing. The fewer moving parts, the fewer the risks and the more likely you’ll be getting that dividend next quarter (and the next, and the next).

Luckily we’re treading on well-known territory here. Namely, retail. The Men’s Wearhouse and Dick’s Sporting Goods both sell products for known and established markets. Affordable Men’s attire on the one hand and non-specialty, high-end sporting goods on the other. It doesn’t get simpler than that.

Advantage: Draw

~ Round 2: Steady Demand

Once again, these two businesses are in the same boat. Retail is cyclical and gets hit pretty hard when the economy slumps.

Case in point: when the market hit the dust in 2009, both stocks got clobbered to the same degree, each losing about 65%.

On the other hand, the action in the market didn’t fully translate into net income getting equally slammed. While net income did drop for each in 2009, The Men’s Wearhouse suffered only a 59.8% decline compared to Dick’s Sporting Good’s  decline of 122.5%

Simply put, affordable menswear remains more necessary in economic downturns than sporting goods, which are largely a recreational luxury.

Advantage: The Men’s Wearhouse

~ Round 3: Cash Flow Positive

In the last year, Dicks generated enough free cash flow to cover its dividend for 2.3 years. The Men’s Wearhouse isn’t far behind, generating enough free cash flow to fund its dividend for 1.97 years.

That’s really just the difference of about one quarter. In the end, both retailers ring up the registers and rake in the cash with more than enough left over to share with shareholders.

Advantage: Draw

~ Round 4: High Cash Balance

Dividend payments don’t grow on trees. And neither does money. So we want to make sure that there’s enough cushion to sustain dividends through harder times. And the more cash-rich the company, the better. There’s nothing to worry about here.

Normally, we want to insist on enough cash to cover two quarter’s worth of dividends. But each company has enough to cover more than three years worth of dividends. That is, before we take into account the $2 per share special dividend Dick’s recently declared.

It’s payable December 28 to shareholders of record December. 17.  Afterwards, Dick’s will only have enough cash to cover about three quarters worth of dividends, whereas Men’s Wearhouse will have enough loot to cover 15 quarters.

Advantage: The Men’s Wearhouse

Despite a slight advantage on the scorecard for The Men’s Wearhouse, Dick’s special dividend might tempt you to stop the fight early in its favor. But there are still four more rounds to go. And trust us, this fight is far from over. So stay tuned for the second part of the standoff, where we’ll decide the winner of the first match of Manly Stock Wars.

Safe investing,

Louis Basenese

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