Last update on 2024-06-27

Gap (GPS) - Dividend Analysis (Final Score: 7/8)

In-depth dividend analysis of Gap Inc. (GPS), scoring 7/8 on sustainability and performance. Explore the key metrics for investors.

Short Analysis - Dividend Score: 7

We're running Gap (GPS) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis of Gap (GPS) dividend policy using an 8-criteria system shows a mixed picture of its performance and stability. Gap (GPS) has a strong dividend yield of 2.8694%, which is above the industry average, and its average payout ratio of 21.40% over the last 20 years is comfortably below the 65% threshold, indicating sustainability in most years. The company has also maintained stable dividends, consistently paid dividends for over 25 years, and has a reliable stock repurchase program. However, the dividend growth rate is inconsistent, and its ability to cover dividends with earnings and free cash flow has shown volatility and recent difficulties. Overall, while Gap shows strong long-term commitment to its shareholders, recent financial instability raises some concerns.

Insights for Value Investors Seeking Stable Income

Considering the mixed results from the analysis, Gap's stock might be worth looking into if you're a long-term investor focused on income, thanks to its strong historical dividend payouts and reliable stock repurchase program. However, be cautious and closely examine the recent volatility in earnings and cash flow coverage before investing, as these issues could impact future dividend sustainability. It could be beneficial to diversify investment risks due to these uncertainties.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a financial ratio that quantifies the annual dividend income an investor receives relative to the price per share. It is a crucial metric for income-focused investors to assess how much income they can expect to gain from their investment in a specific stock. A higher dividend yield indicates a potentially higher income stream, but it can also indicate higher risk if the dividend is unsustainable.

Gap Inc. (GPS) boasts a dividend yield of 2.8694%, significantly surpassing the industry average of 0.98%. Over the past two decades, GPS's dividend yields have demonstrated notable fluctuation, spiking as high as 5.4977% in 2019 and dropping to lows around 0.3878% in 2003. Historically, this yield has often outpaced the industry average, suggesting a relatively attractive income proposition for investors during various periods. However, such fluctuations need to be carefully analyzed within the context of GPS's overall financial health and market conditions. The current high yield is promising but should be examined for sustainability, particularly given recent economic challenges. Coupled with a sensitive stock price closing history—ranging from $23.21 in 2003 to $11.28 in 2022 and back to $20.91 in 2023—investors must consider the volatility and broader market trends. Sustainability is also a factor here due to their history of dividend per share adjustments, previously plummeting from $0.959 in 2018 to $0.572 in 2022 and then rising to $0.6 in 2023.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate criterion evaluates the compound annual growth rate (CAGR) of dividend payments over a period of 20 years. A rate higher than 5% is often seen as a sign of a robust and growing company.

Analyzing the dividendPerShareRatio from 2003 to 2023 for Gap (GPS), we notice significant volatility. The figures range from substantial increases (119.5652% in '05) to severe declines (-50.0514% in '20). Despite an average dividend ratio of 14.8038%, the erratic nature of the growth rates undermines stability. Particularly, negative figures in '07, '13, '17, '20, '21 suggest inconsistency. While the growth rate does exceed 5% in many years, the inconsistency complicates this being viewed positively. Thus, while trend analysis shows potential, the high volatility and negative growth years cast doubt on the dividends' reliability and sustainability, making it a concerning criterion for long-term investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

The payout ratio is the percentage of earnings paid to shareholders in the form of dividends. It is important as it indicates the sustainability of dividends.

The average payout ratio for Gap (GPS) over the last 20 years stands at 21.40%, which is comfortably below the 65% threshold. This lower payout ratio suggests that Gap has been able to consistently retain a large portion of its earnings for reinvestment or for strengthening their balance sheet. Furthermore, in most years, Gap's payout ratio has remained below 40%, illustrating prudent management. However, there have been some anomalies, such as negative payout ratios in 2020, 2021, and a sharp spike to 83.71% in 2022 due to reduced earnings, reflecting periods of distress. On the whole, however, this trend is positive for the average payout ratio criterion.

Dividends Well Covered by Earnings?

Dividends being well covered by earnings ensure that a company has sufficient profits to distribute to its shareholders without impacting its operational efficiencies or capital expenditure needs. It reflects financial stability and prudence in financial management.

Looking at Gap Inc.'s data, it's evident that EPS has fluctuated significantly over the years. The coverage ratio indicates how well earnings cover dividends, with a ratio above 1 meaning dividends are well covered. Between 2003 and 2019, the ratios are consistently well below 1, suggesting that dividends were fairly well covered by the earnings, albeit with increasing strain towards 2019. However, 2020 and 2021 reflect negative EPS, causing the coverage ratio to be negative, which is concerning. Such data signifies financial challenges and raises questions about sustainable dividend payouts during those years. The slight rebound in 2022 mitigates this to some extent, but the negative ratio in 2023 again brings concerns about sustainability. In summary, while historically Gap Inc. managed to cover its dividends via earnings, recent trends indicate potential struggles in maintaining this stability.

Dividends Well Covered by Cash Flow?

This criterion examines the company’s ability to cover its dividend payments with the free cash flow it generates. A higher coverage ratio implies a safer dividend.

Gap Inc.'s free cash flow has exhibited considerable volatility over the past two decades. Between 2003 and 2023, the company’s ability to cover dividends from free cash flow ranged dramatically. For example, in 2017, the coverage was a strong 0.556, while in 2023, it drastically fell to -2.821. This indicates inconsistent free cash flow generation, raising concerns about dividend reliability. Consistent positive free cash flow is essential for maintaining or growing dividend payouts, thus, this volatile trend is concerning for long-term investors seeking consistent dividend income.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

The dividend payouts of Gap (GPS) over the past 20 years show a relatively stable trend. Starting from $0.09 in 2003, dividends gradually increased to $0.6 by 2023. With detailed year-wise dividends such as $0.092 in 2004, $0.202 in 2005, $0.32 in 2006, and continuing to $0.6 in 2023, there hasn't been a significant drop exceeding 20% in any single year. For example, even though there was a drop from $0.91 in 2015 to $0.92 in 2016, it does not violate our stability criterion. Therefore, Gap's dividend policy appears robust and favorable for income-seeking investors.

Dividends Paid for Over 25 Years?

The consistency of dividend payments over a period of 25 years is a crucial indicator of a company's financial stability and shareholder commitment. It reflects the company's ability to generate steady cash flows and its commitment to returning capital to shareholders.

For Gap (GPS), examining the data from 1998 to 2023, we observe a consistent history of dividend payments, with yearly dividends varying from $0.0813 to $0.91 per share. This demonstrates a solid commitment to shareholders. However, there are noticeable fluctuations: for instance, the dividend per share decreased from $0.959 in 2018 to $0.4855 in 2020, likely due to economic impacts such as the COVID-19 pandemic. Despite these fluctuations, the ability to maintain dividend payouts during challenging periods is commendable. Overall, this trend is positive, showcasing financial resilience and a strong commitment to shareholders, though attention to economic context is necessary.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases are an indication of a company's strong cash flow and commitment to returning value to shareholders. Regular repurchases tend to reduce the overall number of shares outstanding, thus increasing the ownership stake of existing shareholders and often signaling management's confidence in the firm's future prospects.

Over the past 20 years, Gap (GPS) has consistently decreased its number of shares from approximately 881 million in 2003 to around 367 million in 2023. This indicates a robust and sustained share repurchase program. The average repurchase rate of -4.131% per year further reinforces this trend, suggesting a company policy focused on returning capital to shareholders and possibly believing its shares are undervalued. This trend is good for shareholders, as it not only enhances earnings per share (EPS) but also signals strong future prospects.