Dividend Investing: Barnes & Noble (BKS)

Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.

I should make it clear that I’m not tacitly recommending any of the stocks I write about. An investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and their own in depth analysis.

At the current stock price of $22.49, bookseller Barnes & Noble (BKS) has a dividend yield of 4.41%. This equates to a dividend of $1 per share.

Barnes & Noble (BKS) is an international bookseller. Its principal business is the sale of trade books, such as hardcover and paperback consumer titles, mass-market paperbacks (such as mystery, romance, science fiction and other fiction), children's books, bargain books, magazines, gifts, cafe products and services, music and movies direct to customers. As per the latest quarterly results the company has 1,362 stores, half of which are Barnes & Noble stores and the other half trading under B&N College. In March 2009, the Company acquired Fictionwise. In September 2009, the Company acquired Barnes & Noble College Booksellers and its trade name that was earlier licensed to the Company. The college book retailer serves 4 million students and 250,000 faculty members across the country.

On a valuation basis the company trades on a PE ratio of 19.8 times, which is historically high but below the peer average. The prices to sales ratio is however enticing at just 0.23 times, while price to book is 1.3 times. The company however is struggling for growth and profitable reinvestment: return on equity, return on assets and return on invested capital are all very low. A low return on invested capital generally means the company’s stockholders are better served by the payment of dividends or share buybacks. The company has no debt on the books and a quick ratio, as per the 2009 annual report, of 1.21 times.

Over the last five years revenue has grown by a total of only 7.3%, while normalized net income (which excludes the effects of extraordinary items, of which there was a $10 million loss last year) have dropped 30% over the same time period. Clearly, the earnings outlook for the company is probably negative.

The real value and source of the high dividend is the cash generated from operations. In 2009, the company generated $383 million in cash from operations. This is an incredible five times more than net income for the same period. The trend over the past five years has seen this ratio at 3.28 times. This in effect means that for every dollar the company reports in earnings, it has generated $3.28 in cash.

In terms of earnings going forward there is a potential catalyst in this equation. Barnes & Noble Nook is an electronic book reader developed by the company and based on the Android platform. The device was announced in the United States on 20 October 2009, and was released 30 November 2009 for US$259. Nook competes with the Amazon Kindle, Sony Reader, and other readers, and includes Wi-Fi and AT&T 3G wireless connectivity, a six inch E Ink display, and a separate, smaller color touch screen that serves as the primary input device. The Nook is likely to generate recurring revenue for the company albeit not on a level that will see earnings explode my any stretch of the imagination.

With strong cash flows, a great product (books, whether in hardcopy of electronic format, will always be in demand), a good balance sheet and strong dividends, Barnes & Noble might be a worthwhile addition to the conservative investor’s income portfolio.

Other dividend paying stock articles: CenturyTel (CTL) here, Duke Energy (DUK) here, Mercury General (MCY) here, TC Pipelines (TCLP) here, ALLETE (ALE) here, ENI SpA (SNY) here, Sanofi-Aventis (SNY) here.