Is This Black Friday Player’s Dividend Safe?

There’s probably no other category of holiday gifts that get people more excited than electronics. Whether we’re talking about flat-screen TVs, noise-canceling headphones, video games or a host of other products, you’re sure to get a better response from the recipient by gifting them a new gizmo than you would with a pair of long johns.

This year, electronics retailer Best Buy (NYSE: BBY), in an effort to capture more revenue, started its Black Friday sale last week. Pretty soon, Black Friday will start right after April Fools’ Day.

Best Buy pays a $0.70 per share dividend. Will Santa continue to deliver a 2.4% yield to good shareholders, or will they receive a lump of coal in the form of a dividend cut in 2022?

The company’s free cash flow has been steadily rising over the past several years. It spiked in fiscal 2021 (ending in January), climbing from $1.8 billion in fiscal 2020 to $4.2 billion.

However, that jump isn’t all it appears to be.

Nearly $1.7 billion of that difference was due to higher accounts payable (outstanding short-term debt). In other words, until the company signs the check to pay those invoices, that cash hasn’t gone out the door yet and still appears as free cash flow on the balance sheet. There was also a $500 million line item classified as “other liabilities.” It’s not clear what those liabilities are, but suffice it to say, it represented cash that will be used but hadn’t been yet.

In fiscal 2022, which ends on January 31, 2022, free cash flow is forecast to be $2.2 billion, so that’s slightly higher than last year’s free cash flow when you exclude the higher accounts payable and other liabilities.

All that cash flow makes it so that Best Buy can easily afford its dividend. Last year, it paid out $568 million. This year, it is forecast to pay $738 million, which gives it a low 33% payout ratio.

Generally, I like to see payout ratios of 75% or lower. So 33% means free cash flow could be cut in half and Best Buy could still afford to pay the dividend.

Rather than receiving a giant haircut to free cash flow, Best Buy anticipates $2.2 billion in free cash flow, and it is likely to raise its dividend for the 18th year in a row in March.

Best Buy has raised its dividend every year since it began paying one in 2004.

Regardless of what happens this Christmas season, Best Buy appears to have plenty of free cash flow to continue to reward shareholders for years to come.

Dividend Safety Rating: A

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