Best Buy Sees Growth Accelerate With All Stores Reopened; Dividend Safety Score Upgraded to "Safe"

Best Buy's performance during the pandemic has exceeded our expectations, prompting us to upgrade the company's Dividend Safety Score from Borderline Safe to Safe.

Best Buy reported earnings results on August 25, recording comparable sales growth of 5.8% despite its stores being open by appointment only for about half of the quarter.

With all of its stores now fully reopened, sales increased 20% through the first three weeks of August.

Best Buy's product mix and focus on digital (19% of sales last year) have driven its resilience during an otherwise very difficult time for most brick-and-mortar retailers.

Computing and mobile phones accounted for 45% of the firm's sales last fiscal year, followed by consumer electronics (33%), appliances (11%), entertainment (6%), and services (5%).

The coronavirus has shifted consumer demand into many of these categories as more people work remotely, spend more time at home, and engage with each other virtually.

Looking ahead, analysts expect Best Buy's earnings to grow about 9% over the next year, resulting in a healthy payout ratio near 30%.

Source: Simply Safe Dividends

While the current boom in demand for electronics won't last forever, it also seems unlikely that Best Buy will have to close all of its retail stores again like it did in March.

That risk concerned us the most earlier this year since many retailers can't turn a profit in such an environment due to their high fixed costs (Best Buy remained profitable). 

Best Buy should continue generating solid cash flow in the current environment. Even if future demand misses expectations, the retailer's investment grade balance sheet and solid liquidity remain supportive of the dividend.

Best Buy ended last quarter with $5.3 billion in cash, well in excess of its $1.3 billion of book debt. For context, the dividend costs around $570 million per year. 

Overall, Best Buy's product mix, cash flow generation, and balance sheet should help the firm remain one of the few retailers to not cut or suspend its dividend during this downturn.