Ethan Allen Stock: A 4% Yield Dividend Stock With Specials, Double-Digit Upside (NYSE:ETD)

Introduction

While researching its more well-known peer Leggett & Platt (LEG), I came across Ethan Allen Interiors (NYSE:ETD). I’m constantly in search of quality dividend-paying stocks that I can add to my portfolio, especially those trading at a good price. As a buy-and-hold investor typically, I look for those with not only solid business models, but fundamentals as well.

What’s the point of buying a company that I foresee myself holding for only a few months to get a dividend payment? I look for those that will likely continue not only to pay a dividend but grow it over time. Throw in specials on occasion and it may really be one worth considering. In this article I discuss why dividend investors should consider Ethan Allen as a holding for their income-focused portfolios.

Brief Overview

Some of you may be familiar with the company. Until my research, I had never heard of them. But they are a leader in interior design and a manufacturer & retailer of high-quality home furnishings.

ETD is headquartered in Danbury, Connecticut and IPO’d in 1993. They have design centers throughout the United States and abroad. They were founded in 1932 and incorporated in the late 80’s. And also offer some of the finest luxury classic furniture items, probably why I had never heard of them. Because for me a couch is a couch; it’s there to sit on and nothing more. I’ve also never owned a home but that may change if I decide to purchase one.

Latest Quarter

Ethan Allen reported their fiscal year Q2 earnings back in February. The company missed on both the top & bottom lines with EPS of $0.67 missing estimates by $0.09 while revenue of $167.28 million missed by $11.92 million. With the challenging economic backdrop causing consumer financials to become tighter because of interest rates, you can understand why the company’s financials have been suppressed.

The company also missed estimates on both in Q1 but both grew quarter-over-quarter in Q2. Despite the misses in both quarters, the company showed strong operating margins with gross margins of 6.1% and operating margins of 12.1% during the first quarter. However, delivered sales declined double-digits by 23.6%. This was impacted by softening of the economy and a major flood in their Vermont manufacturing operations.

Consolidated net sales were $163.9 million, also impacted from lower unit volume from softening demand. However, net sales grew quarter-over-quarter by roughly 2% to $167.3 million. Gross margins also improved to 60.2%, the 11th consecutive quarter exceeding 58%, while adjusted operating margins improved to 12.8% from the prior quarter.

Gross margins of 60.2% also improved from 56.5% in 2021 and 59.3% in 2022. Margins stood at 60.7% & 16.3% respectively for the full-year ’23. So, despite the challenges the company has faced, they’ve shown strong margins, improving over the last two years.

For the full-year analysts are expecting earnings of $2.79, down significantly from $4.03 at the end of 2023. But they do expect the company to get back on the path to growth in 2025 with EPS expected to increase nearly 9% year-over-year.

And if interest rates do decline as expected, Ethan Allen will likely see improvements on its top & bottom lines. Of course, there are talks of a recession in the foreseeable future, but that remains to be seen. The FED is expecting to avoid a recession, but no one knows what the future may hold.

Shareholder Friendly

Despite the challenges, which I expect the company to overcome in the near future as margins and financials are likely to improve, the company is very shareholder friendly rewarding shareholders with occasional special dividends.

Ever since they were forced to cut the dividend during the Great Financial Crisis, they’ve paid out multiple specials, including a $1.00 special in 2019 and $0.75 in 2021. Furthermore, over the past two years they awarded a special of $0.50 each year.

They also continue to grow the regular dividend with a growth rate of 71.4% since the pandemic in which the company paused the dividend. For the 1H of the fiscal year the company has paid out $31.1 million in dividends and brought in $32.3 million in cash from operations. Their current yield of over 4% is also attractive.

And while the FCF payout ratio for the full-year is tight currently with cash from operations down nearly 26% from $40.9 million to $30.3 million, the company can afford to continue paying the regular dividend along with occasional specials due to its stellar balance sheet which has NO DEBT!

At the end of the latest quarter the luxury furniture maker had a debt balance of $0 and a cash balance of $55 million. That is impressive! For the quarter they generated $13.6 million in cash from operations and paid out $9.2 million in dividends giving them a safe payout ratio of roughly 68%.

While the company deals with weaker consumer demand due to the challenging economic backdrop, I expect them to temporarily pause paying special dividends for the foreseeable future. But I suspect these will continue once management gets more visibility on the economy and clarity surrounding interest rates.

Valuation

At the current price of roughly $33 a share, this gives ETD a forward P/E of roughly 11.7x, below the sector median of nearly 16x and their 5-year average of 12.78x. If the company can get back to growth like they have been in the past, I see the company rewarding shareholders with promising upside. Their P/E is also less than larger and well-known peer, LEG’s 15x and slightly lower than La-Z-Boy’s (LZB) 12.4x.

While the recent pandemic caused consumers to shift their focus to items like traveling, management sees positive trends with consumers’ focus shifting back to their homes which will likely impact the company positively.

More so, management saw an uptick this past December and the company expects to capture some of this growth. If so, they can see some nice upside once interest rates start to decline and tightening eases. Using the Discounted Cash Flow Model and a growth rate of 3% and ROR of 9%, in-line with the S&P historical 7% – 10%, this bring their fair value to roughly $42. That’s roughly 24% upside from the current price.

Risks

Seeing as how the company has been greatly impacted by changing consumer spending habits from the pandemic, an unexpected economic downturn like a recession could really hurt the business financials going forward. As a luxury furniture maker, consumers will likely spend their money on less-expensive items as their financials become even tighter.

There’s also the impact on rising credit card debt which has been on a steady incline the last few quarters. With interest rates rising over the past two years, consumers have had to rely heavily on credit cards, in turn growing the balance to $1.079 trillion at the end of Q4. This rose $273 billion from 2 years ago. And if rates stay higher for longer, this will likely continue to grow giving consumers less income to spend on luxury items from companies like Ethan Allen.

Bottom Line

Ethan Allen is a lesser-known company that has been around for more than 20 years. And although they were forced to cut the dividend during the GFC, the luxury furniture maker has impressively grown their dividend while rewarding shareholders with occasional special dividends.

The company has faced headwinds with changing consumer spending habits since the recent pandemic but has shown strong financial strength despite this and improving gross margins over the past few years. Furthermore, the company has a fortress balance sheet with $0 debt. This gives them financial flexibility to continue paying the regular dividend. With a 4% yield, shareholder friendly management, fortress balance sheet with double-digit upside potential, I rate Ethan Allen a buy.