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Manly Stock Wars: The Men’s Wearhouse vs. Dick’s Sporting Goods (Part 2)

We’re back today to finish last week’s match of Manly Stock Wars

Duking it out are The Men’s Wearhouse (MW) and Dick’s Sporting Goods (DKS). And so far, round-for-round, Men’s Wearhouse has a slight advantage with steadier, more recession-proof demand and a higher cash balance.

We’ve still got four rounds to go and the winner is anything but decided.

So let’s get back to it…

~ Round 5: Minimal Need for Credit

The more pressure there is to pay down debt and reduce payments on interest, the more likely management will give cash distributions the shaft.

For that reason, finding those companies with manageable amounts of debt on the books should be a priority when looking for long-term dividend investments.

Luckily, debt is a non-existent problem, here.

The most recent financial statements show that both companies are entirely debt free.

That means that creditors don’t stand a chance of snapping up your next quarterly payment.

Advantage: Draw

~ Round 6: Earnings Buffer

Just like cash can provide a buffer, so can earnings. That is, as long as a company doesn’t pay out 100% of earnings each quarter. We can track this buffer by calculating a company’s dividend payout ratio (DPR). As a general rule, I recommend investing in companies with DPRs of less than 80%.

Dick’s has a trailing 12-month DPR of 40.4%. But The Men’s Wearhouse checks-in as the better bet, with a DPR of almost half that at 21.74%.

Advantage: The Men’s Wearhouse

~ Round 7: Dividend Yield and Growth

Not only do we want good returns of capital, we want increasingly good returns of capital. So it’s hardly a surprise that – everything else being equal – good yield and strong dividend growth take the cake as the most decisive figures in dividend investing.

Let’s see if it plays out as decisively here…

So far, each round has been close. But in this case, Men’s Wearhouse runs laps around Dick’s. The former clocks-in at slightly above-average with a yield of 2.38%. But its aggressive five-year average dividend growth rate of 26.37% is tough to beat.

Dick’s doesn’t come close on either count. Its yield of 1.11% misses the mark by a country mile. What’s more, since it only started payments this year and hasn’t declared any increases (its special dividend of $2.00 notwithstanding), there’s no growth rate to speak of.

Advantage: The Men’s Wearhouse

~ Round 8: Valuation

Even if capital appreciation takes a backseat to income, that’s no reason to disregard the relative importance of hunting for a bargain. Paying through the nose for limited upside is never a good idea.

And just like the last round, the winner here is clear as day…

Dick’s Sporting Goods is trading at 20.9 times historical earnings. That’s a 38% premium to the average stock in the S&P 500 Index. On a forward price-to-earnings (P/E) ratio basis, the stock isn’t exactly a bargain, either. It’s trading at almost a 10% premium to the S&P 500.

Compare that to Men’s Wearhouse. Its P/E of 11.8 is 21% below the S&P’s average. And its forward P/E ratio of 9.4 represents a 34% discount to the average stock in the S&P 500.

Advantage: The Men’s Wearhouse

Let’s go to the score card…

After eight rounds – three of which were draws – here’s the final score:

Men’s Wearhouse: 5

Dick’s: 0

Ouch.

With steadier demand, a higher and faster-growing yield, a cheaper valuation, less debt, a lower DPR, and higher cash balance (whew!), The Men’s Wearhouse wins our first match of Manly Stock Wars.

Next in the ring, we have Harley Davidson (HOG) vs. Ford (F)… and then Cat (CAT) vs. Deere (DE)…

So stay tuned for the next matchup!

Safe investing,

Louis Basenese

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