2024 is on pace to become another banner year for the stock market, with the benchmark S&P 500 delivering total returns of 17% year to date. However, the strong performance has been uneven and several stocks have yet to fully recover from 2022's drops. Roughly 30% of the index's components trade down so far in 2024, including some otherwise dependable dividend stocks.
Unfortunately, some of those stocks may never fully recover. But there are at least two underperforming dividend stocks that show clear potential to bounce back. While they do, their dividends are strong enough to offer growing annual yields at attractive valuations. Let's take a closer look at why these two dividend stocks are worth doubling up on.
1. Academy Sports and Outdoors
Academy Sports and Outdoors(NASDAQ: ASO) is a former military surplus retail chain that transformed itself into a sporting goods and outdoors retailer. The $3.9 billion company operates 284 stores located primarily in the Southern United States. Academy's stock price has fallen almost 19% so far in 2024 as its sales have stagnated. Management says Academy Sports' performance has been tamped down by consumers being challenged by the "current macroeconomic environment."
Academy Sports initiated its public offering in October 2020, so the stock is still relatively young. But its operations are already profitable enough to justify paying out a quarterly dividend. At recent share prices, that $0.11 per share quarterly payout offers up an annual yield of 0.8%. The yield isn't much to entice income investors -- yet. But the company has already raised the dividend twice in two years, with bumps of 20% and 22.5%. Investors should have some confidence that that growth will continue.
With any dividend-paying stock, prospective investors should be mindful of the payout ratio, too. Once payouts start to account for 75% or more of free cash flow, there is reason to be cautious that a cut is coming. That is nowhere near the case here as Academy Sports' payout ratio is a very manageable 5.7%, providing more justification for sizeable dividend increases in the future.
After hitting all-time highs in early March 2024, the stock is taking a hit this year as Academy Sports has now reported multiple quarters of small year-over-year declines in net sales and comparable sales, failing to match gains set in 2023. Management said it expects the tough comps and consumer sentiment challenges to persist throughout the remainder of its fiscal 2024 (ending in late February 2025) and it's guiding for annual revenue of negative 1.5% to gains of 3%. Management also said it plans to open 15 to 17 new locations this year, which can explain the variable revenue forecast.
On the bottom line, net income fell 18.6% year over year to $76.5 billion in its most recently reported quarter (Q1 of fiscal 2024, which ended May 4). For its fiscal 2024, management is guiding for $455 million to $530 million in net income. At the midpoint, that would be about a 2% gain from the $483.2 million it earned in fiscal 2023.
Currently, the company trades for a modest 8.5 times forward earnings, significantly below its largest U.S. competitor, Dick's Sporting Goods, which trades at 15.7 times forward earnings despite facing similar challenges with stagnant revenue and net income.
While management waits for consumer demand to recover, it is aggressively allocating capital toward reducing its debt and repurchasing stock. The company decreased its net debt from $291.6 million at the end of fiscal Q1 2023 to $108.9 million by the end of fiscal Q1 2024. Additionally, over the past three years, management has reduced the number of outstanding shares by 22.4%, significantly increasing the ownership stakes of existing shareholders.
Looking ahead, while tightened consumer discretionary spending may continue to weigh down its sales, Academy's attractive valuation and astute capital allocation strategy suggest a compelling stock worthy of further consideration.
2. Nike
Shares of Nike(NYSE: NKE), the world's leading supplier of athletic shoes and sports apparel, fell sharply following a disappointing fiscal 2024 Q4 report delivered in late June. The stock is now down by around 33% year to date.
Despite this, Nike continues to be one of the most shareholder-friendly businesses on the market, with a 22-year dividend-hiking streak. At recent share prices, its quarterly dividend of $0.37 per share gives it a 2% annual yield. The payout is quite manageable with a payout ratio of 28.2%.
The stock's struggles can be attributed to declining digital sales and reduced demand in the Chinese market. For its most recently reported quarter, net sales fell 2% year over year to $12.6 billion. Worse yet, CFO Matthew Friend suggested on its most recent earnings call that Nike won't be able to fix these problems in the near term, adding, "The next few quarters will be challenging."
So why buy the stock now? Nike has an impeccable balance sheet with $2.7 billion in net cash, meaning it likely won't need to take on expensive debt any time soon. The company even earned roughly $161 million in interest income from its cash position in fiscal 2024.
Moreover, Nike's gross margin and bottom line increased for its most recently reported quarter. Specifically, its gross margin -- a key indicator of operating efficiency as well as pricing power for consumer goods companies -- increased by 1.1 percentage points, which helped it grow its net income by 45% year over year to $1.5 billion.
Due to the stock's rough year, it trades at 22.9 times forward earnings, a three-year low.
Are these two struggling dividend-paying stocks worth buying?
Academy Sports and Nike stocks are currently underperforming due to decreased consumer spending on activewear and goods. However, this presents a compelling buying opportunity. Both companies boast strong cash positions and consistent profitability, allowing them to continue returning capital to shareholders through growing dividends. When consumer demand rebounds, these stocks are poised to bounce back.
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Collin Brantmeyer has positions in Academy Sports And Outdoors and Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Academy Sports And Outdoors and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
