Dick’s Sporting Goods Down ~7% Year-to-Date; Sticking with It Long Term

Image Source: Mike Mozart

By Brian Nelson, CFA

Dividend growth investing continues to face pressure during 2023 as investors have migrated to entities with strong net cash positions, solid free cash flow generation and secular growth prospects, many ideas of which can be found in the areas of big cap tech (XLK) and large cap growth (SCHG). The SPDR S&P Dividend ETF (SDY), which includes high-yielding Dividend Aristocrats, is down more than 4% so far in 2023 on a price-only basis and is off more than 6% over the past year, also on a price-only basis. With interest rates on the rise, the tradeoff between owning a certificate of deposit at the local bank yielding north of 5% and dividend growth equities with 2-3% dividend yields becomes a much more challenging proposition. Nonetheless, we still like the merits of dividend growth investing in the long run.

Some of our favorite dividend growth ideas in the Dividend Growth Newsletter portfolio include Cisco (CSCO), Microsoft (MSFT), Oracle (ORCL), Apple (AAPL), and Republic Services (RSG). Cisco is up more than 15% year-to-date, Microsoft is up more than 34% year-to-date, Oracle is up more than 38% year-to-date, Apple is up over 40% year-to-date, and Republic Services is up more than 14% year-to-date. These dividend growth ideas are trouncing the basket of high-yielding Dividend Aristocrats. With big cap tech and large cap growth powering the market higher during 2023, it’s been great having this type of exposure within the Dividend Growth Newsletter portfolio, and we hope you have enjoyed it, too. Other traditional dividend growth areas such as utilities (XLU) and real estate investment trusts (VNQ) are down ~11% and flat so far this year, respectively, so we’ve been doing a good job picking the right spots in 2023 following outperformance in 2022, which was a very challenging year for many.

That said, sometimes there’s an idea that does really well and then it comes back down to earth, and that’s what has happened to Dick’s Sporting Goods (DKS) during the past several months. After a strong run so far in 2023, during the trading session August 22, the company has given up all of its gains so far in 2023, and now is down more than 6% so far this year, trailing the SPDR S&P Dividend ETF by a couple percentage points. As we wrote in this article, the concern across brick-and-mortar retail these days is shrink, perpetuated in part by organized retail crime. As people cocooned at home and online purchases soared during the COVID-19 pandemic, organized retail crime seemed to balloon as stolen items could easily be sold quickly online. Retailers continue to work to mitigate shrink with varying degrees of success.

Unlike big dividend growth winners such as Cisco, Microsoft, and Oracle, which are higher weightings (5%-7%) in the Dividend Growth Newsletter portfolio, Dick’s Sporting Goods has a smaller 3-5% weighting and fills a more diversifying role with respect to retail. That said, the sporting goods retailer’s second-quarter results (ending July 29, 2023) missed top-line consensus expectations by a small margin, but the miss on the bottom line was a bit more pronounced due to concerns over shrink. Dick’s Sporting Goods, however, still delivered 3.6% sales expansion in the period while quarterly comparable store sales increased 1.8% (an improvement from the 5.1% decline in last year’s quarter), as it reiterated its 2023 comparable store sales target of “flat to positive 2%.” The company’s full-year 2023 outlook for diluted earnings per share now stands at $11.33-$12.13 (was $12.90-$13.80), implying shares are trading at about 10x current-year earnings.

Dick’s Sporting Goods’ cash-based sources of intrinsic value remain resilient. The firm ended its second quarter with a modest net cash position, while free cash flow surged during the first half of 2023 (~$450 million versus -$65.9 million). We expect a modest decrease in our fair value estimate of Dick’s Sporting Goods upon our next report update, but we won’t be removing the company from the Dividend Growth Newsletter portfolio. Shrink is a big issue across brick-and-mortar these days, but we still want to have some retail exposure in the Dividend Growth Newsletter portfolio, and Dick’s Sporting Goods fits the bill; Home Depot (HD) is another retail dividend growth consideration. Dick’s Sporting Goods will continue to play an important diversifying role in the Dividend Growth Newsletter portfolio, particularly in the context of our favorite areas of big cap tech and large cap growth–which have done extremely well this year and have been well-represented across the newsletter portfolios.

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Tickerized for DKS, ASO, FL, HIBB, BGFV, JDSPY, ADDYY, PMMAF, NKE, UA, UAA, LULU, MODG, ONON

Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies. 

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