Greg Denewiler: [00:00:11] This is Greg Denewiler, and you are listening to another episode of the Dividend Mailbox. A monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks. When they grow over time, a funny thing happens, you create wealth.
Welcome to the Dividend Mailbox, and if you've listened to our podcast, you'll know this is a little out of the ordinary— sort of, in between our normal schedule. We just put out an episode a few days ago, but a situation came to light today and we thought this is a great time to do a brief update, just to help give clarity on how we execute our dividend growth strategy. And today, Williams Sonoma announced earnings. The stock was hit fairly hard, at one time it was down about 12%. It ended up closing down about 4%.
So if you go back, we've brought this company to your attention several times. Originally it was in episode 14 back in August of 2022. We mentioned it again in December of 2022. We mentioned it again in April of 24, and then we did pretty much an entire podcast on it in December of 24 because at that point we were starting to sell part of the position. The thing that I think is fascinating is this is really kind of our entire strategy that normally would take a decade or more to play out, this one has actually run in less than three years. It appears to have gone full cycle. Totally, pretty much met our expectations. Now it's selling off again.
This happens to be Wednesday, March 19th when we're recording this. The stock has come down quite a bit from its high last year. It was trading at around $170 yesterday. The stock did come back a little bit at the close and closed around $166, but we thought, okay, you've got a position that's moving a fair amount—or I think we can safely call this a lot when you have a position moving more than 10% in one day. So what do you do? Do you worry? Do you buy more? You know, exactly what do you do?
Well, in our previous episodes we explained why this was such a great dividend growth story, and as it turned out, it was really way better than we imagined. We started buying it in the fall of 2022. In our model portfolio split-adjusted, we paid $58 for it or a little less. By November of 2024, which is basically two years later, we sold 30% of the position and took out almost the entire original cost basis that we had put in it. And then by January, the stock had continued to move higher and we sold another 30%. So at that point, we have taken out 150% of our original investment. Not only did we get our money out, but we have gotten additional cash. And one point to remember. At its current price, we still have about 50% more than our original purchase price. So this has been a huge winner.
Why did we sell it? The previous podcast will tell you, the very short version is the dividend yield had dropped below 1% and we pretty much were looking at it saying, “Hey, we've got eight or nine years of performance here that we normally look for in two years or less.” So that's why we started to liquidate.
Lo and behold, the stock starts selling off. The market's been struggling here in the last few months. Everybody's seen the headlines there and the stock has been coming down. You're starting to get a little bit of recession worries, and of course, retail usually doesn't do that well in recessions.
Well, William Sonoma issued an earnings release this morning and they actually beat expectations on earnings and revenue, but the market interpreted the results that they were a little weak on their guidance for 2025. So the stock got hit hard.
You know, one would ask, okay, what do I do with all this? Should I be looking at buying more of it? Do I regret not selling all of it? What I'd like to do now is just do a quick overview of how we look at how this has played out. Again, this is all about execution and how you have long-term sustainable dividend growth.
The good news is, since we've taken 150% of our money out and sold it at levels where the dividend yield was 1% or less, just putting the money in the money market and looking for new opportunities, we tripled the income that we're getting off of that amount of stock—out of that value that we sold. So right away we significantly added to our income stream to meet our 7% plus objective of annual income growth. So the first thing there was everything was great.
Should we have sold at all? Well, here's one of the reasons why we have not sold it all. Today, they announced a dividend increase of 16%. They have been aggressively growing the dividend. From the standpoint of a dividend growth story, it is still very attractive. In fact, now the dividend rate is up to 1.65%. The good news here is now the dividend is back above what the SP 500 dividend is, and clearly William Sonoma is growing faster.
So is this still a good story going forward? We think it is because, number one, their margins have continued to improve. Their operating margins—actually, they're almost 18%. They're projecting 17.5%, so just down slightly. Revenue is expected to be basically flat, either up or down one and a half percent. They have no debt. They have $1.2 billion in cash. They generate 1.1 billion in free cash flow. William Sonoma has a $20 billion market cap. Just based on free cash flow, it's a 5.5% yield. I will tell you right there, one reason why we wouldn't put more money into it right now is that in our book, that's just beginning to get to a point where we will consider it. Being that the dividend yield is less than 2%, we just don't view it as a real attractive place to put new money or add more money to it right now.
Actually, you know, another reason why we bought this stock and why we really loved it and thought it checked all the boxes, except for one—but we'll get to that in a minute—they appeared to have not bought back any stock in the last quarter, which is one thing that we have really admired about this. They've been very strict. They've been very good about managing the balance sheet, about just because they have cash, they don't spend it. And they have been somewhat selective in when they buy back stock for when they think it's attractive. So the fact that they didn't buy any more stock back, I just think is another point of this is a company we would like to stay involved with but to put more money in it, we'd like to see it come down some more.
One of the things that we really stress frequently is we have this 10-year model. And right now the dividend has just been bumped to $2.66. Can they double the dividend? Well, that's going to take the dividend up to $5, if it takes 10 years to double it. Well, right now, without growing earnings at all, and earnings are not quite $9, that would be about a 60% payout. Based on what they're doing right now, that's easily attainable.
And here's an interesting kind of footnote. Since we started buying this stock, it had $7.7 billion in revenue. A little over two years later, revenue is at $7.7 billion, so we've had no revenue growth. That's one box that's not checked on this story. Everything else is really, um, good. Well, we actually prefer management owned a little bit more, but what we have had is earnings growth because margins have improved. The dividend has performed extremely well because it generates tons of free cash flow. They have no debt. And part of this story originally was the fact that they were buying back stock relatively aggressively. And that alone was going to lead to some dividend and earnings growth, even if revenue never grows at all. If cashflow continues where it is and the stock comes down a little bit more, it's going to open up more buyback opportunities. The lower stock price and the ability to buy it back cheaper, all things equal, reduces the number of shares outstanding. So that just means that the dividend, if they pay the same dollar amount, gets spread over fewer shares. So your dividend goes up with no growth at all. And that's the same thing, the same concept for earnings. So it has multiple compounding effects tied to it. Without any growth, this thing is still a decent dividend growth story.
We would much rather see revenue growth than not, but the good news is they do expect to grow mid to high single digits, so five to 10%. If this company grows at 5% and they can maintain its margins roughly where they are, if they continues to have the discipline that they've had on the balance sheet, even at this price, this thing is probably going to be at least a total return double from here over the next decade.
You may be asking, well, okay, why don't you take advantage of the weakness? The problem we have is we're starting at a lower dividend that we normally like to look at. We try to target 2.5-3% and we're still quite a ways below that. Then you throw one more piece into it. If we go into a recession—who knows, but the headlines are fast and furious.—if we do, we're going to be able to buy it cheaper. If we don't and the stock stays up, then we still have a position in it and we have the cash to go somewhere else.
The key takeaway that I would like to leave with is. How many times do you really like to see your position decline? In this case, we actually have no problem if it continues to decline, even with what we have left in it for two big reasons. It's a long-term growth story, and number two, a big part of our original story was with the cash flow that they were generating they could buy back—this company could basically go private in less than 10 years. So we really view this as long as management continues to use discipline and manage their balance sheet well then the story is alive and well and we just continue to look at it as an opportunity, whether it goes higher or lower.
If it goes higher, we'll potentially sell some more. There is a point where if we feel our opportunity cost is just too great and if there are other opportunities, then we will potentially sell it all. If it goes lower, then we will at some point look to add money again to this. Just the way the numbers are now—and of course, you know, this changes every quarter, so it continues to evolve. But just based on where it is right now, we would like to see a two and a half percent dividend yield. At that point, it's in our sweet spot and we would start buying it. Based on the current $2.66 cents, we have to have this thing down to about $105. And then on one additional note, if the stock's around $105, with the current free cash flow, no growth, but just the 1.1 billion, you're looking at an 8% free cash flow yield. So at that point we're really back into it and we're starting to get aggressive.
Will that happen? If we get a recession I would say the odds are probably 80% that it'll happen. If we don't get a recession and it takes a few years, they continue to grow the dividend and earnings, we may or may not. It's really a total flip of the coin, unless there's maybe a management issue that comes up, or margins start to erode, then maybe we'll get it there. But you can be confident that if we ever start buying it, we will mention it.
As we stand right now, we're kind of in the middle. We're in a great position. We've taken all our money plus out. We've still got great dividend growth on what's left, and this is one of those situations where you have to look at, okay, what's my objective? It's total return, it's dividend growth. We've had the total return, we've had the dividend growth. The dividend growth is still alive and well, but with the stock at a somewhat elevated price, we probably don't have the total return growth going forward at the moment, at least based on our opinion. We just continue to look for opportunities in other places because Williams Sonoma is not the only stock that will provide 7% growth over the next decade.
The great thing about this strategy is you let your strategy really drive the rules. That's what we're constantly trying to do here at The Dividend Mailbox
If you enjoyed today's podcast, please leave us a review and subscribe. If you would like more information regarding dividend growth or our investment strategy, please visit growmydollar.com. There you'll find previous episodes and also our monthly newsletter. If you have any questions or anything to add to today's episode, please email ethan@growmydollar.com.
Past performance does not guarantee future results. Every investor should consider whether an investment strategy is right for them and all the risk involved. Stocks including dividend stocks are volatile and can lose money. Denewiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.
