Dividend stock Burberry (LSE:BRBY) now offers investors a 3.2% dividend yield. That’s not bad, but it’s someway behind the index average around 4%.
Burberry isn’t known for its dividend, and the reason we’re seeing the yield push upwards is because the share price has fallen 37.1% over the past 12 months.
That’s because dividend yields and share prices are inversely correlated.
So is now the right time to buy Burberry stock?
The fall from grace
In November, Burberry warned that the slowdown in luxury demand was negatively impacting current trading and could affect full-year sales.
While the London-based fashion house reaffirmed its confidence in its medium- and long-term targets, management highlighted that it hadn’t been immune to the wider challenging market conditions.
The announcement wasn’t a huge surprise. Especially after a number major players, including Kering, Hermès and LVMH, recorded slowing earnings.
In the announcement, Burberry guided towards a mid-single digit revenue decline — in percentage terms — for the year.
From a broader perspective, analysts put this down to slowing economic growth in the US, stagnant growth in Europe, and Chinese growth below long-term trends.
And while Burberry’s high-wealth customers may be fairly insensitive to price changes, they’re not immune to economic upheaval.
Long-term prospects
Luxury goods brands tend to trade at high multiples (high price-to-earnings (P/E) ratio). This is because they’re aspirational and benefit from broad long-term trends in economic growth.
For example, as emerging markets experience economic development and an expanding middle class, there’s an increasing demand for luxury brands.
Of course, similar trends are at play in mature markets like the UK, although we’re not seeing a growing middle class at the moment.
Likewise, Burberry may see positive effects from tourism trends, as travellers often engage in luxury shopping. Locations with high tourist traffic can boost sales for the brand.
Good value?
Burberry appears to represent good value on several near-term metrics. For example, it has a P/E TTM (trailing 12 months) ratio of 11.9. This represents a 33% discount to the sector average. On a forward basis, it trades at 12.7 times earnings — reflecting a 24.9% discount to the sector.
That’s certainly positive, but when we look at growth-focused metrics such as the price-earnings-to-growth (PEG) ratio, Burberry doesn’t look so attractive.
The issue is that the company’s earnings per share are expected to grow at a 7.73% CAGR over the next three-to-five years. That’s a negative 25.3% difference to the sector.
As the PEG ratio is calculated by dividing the forward P/E ratio by the CAGR, Burberry’s PEG ratio isn’t that strong.
In fact, the PEG ratio currently sits at 1.64. Now, a ratio above one normally suggests a company is overvalued. However, the ratio is not perfectly accurate when a company pays a dividend.
Nonetheless, Burberry still looks a little overvalued to me giving the negative earnings revisions. However, it’s a stock I’m keeping a close eye on as long-term trends should stand in its favour.
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James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
