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Should you buy Nick Scali shares for the massive 8.7% dividend yield?

The Nick Scali Limited (ASX: NCK) share price has been a strong performer on Wednesday.

In early afternoon trade the furniture retailer’s shares are up 9% to $5.62 following the release of its half year results.

Here is a summary of how Nick Scali performed during the six months to December 31 compared to the prior corresponding period:

  • Revenue increased 10.3% to $141.1 million.
  • Like for likes sales were flat.
  • EBIT margin narrowed 90 basis points to 25.4%.
  • EBIT rose 6.5% to $35.8 million.
  • Earnings per share of 31.3 cents.
  • Interim dividend increased 56.3% to 25 cents.
  • Outlook: Same store sales negative in January.

What happened in the first half?

During the six months sales revenue increased 10.3% on the prior corresponding period to $141.1 million. This was driven by the full year contribution of six stores opened in FY 2018 and a smaller contribution from four stores opened during the first half.

Pleasingly, Nick Scali reported a 20-basis point increase in its gross margin during the half, but this was ultimately offset by a 90-basis point increase in operating costs driven by new store openings and inflationary cost increases.

Managing director, Anthony Scali, was pleased with the company’s performance considering the tough trading conditions.

He said: “By following our store rollout strategy, our team has delivered growth in top line sales and a corresponding record profit in a difficult retail environment. The result demonstrates that even during periods of low, flat or marginally negative same store sales growth, our Company is geared to deliver profit growth.”

In addition to this, Mr Scali revealed that the company’s strong cash flow and balance sheet means the board has decided to lift its payout ratio significantly.

The company has lifted it from 55% to 80% of earnings, meaning an interim fully franked 25 cents per share dividend. This dividend will be paid to eligible shareholders on March 27.

The good news is that the board intends to increase the full year payout ratio as well, in order to “deliver superior returns to shareholders in FY19.”

Should you invest?

Even after today’s strong share price gain, Nick Scali’s shares are changing hands at just 10.5x trailing earnings and provide an enormous trailing 8.7% dividend yield.

Although I believe its earnings growth will remain challenged in the coming years and rely heavily on its store expansion plans, I feel its shares are already priced for limited earnings growth.

This could make it a great option for income investors along with fellow cheap retail shares Accent Group Ltd (ASX: AX1) and Super Retail Group Ltd (ASX: SUL).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended Accent Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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