Is this Blue Chip Dividend stock a buy?

How can an investor be sure that a company is of quality? Investing is as much an art as it is a science, but outperforming the market for at least five years is usually a good sign.

Delivering total annual returns of 28.7% over the past five years, the home retailer Williams Sonoma (WSM -4.15%) far exceeded the S&P500 annual total returns of 12.8% of the index over the same period. A $10,000 investment in the retailer would now be worth over $35,000 with dividends reinvested. For context, that’s nearly double the $18,000 the S&P 500 index would have put the same investment in at that time.

But is Williams-Sonoma stock still a buy for dividend investors? Let’s look at the company’s fundamentals and valuation to find out.

Strong brands and a favorable clientele

For those unfamiliar with Williams-Sonoma, the kitchen and home furnishings retailer has a variety of well-known brands. These include the eponymous Williams-Sonoma, Pottery Barn, West Elm and Mark and Graham.

The company reported net revenue of $2.1 billion for the fiscal second quarter that ended July 31. This equates to a 9.7% year-on-year growth rate. Williams-Sonoma’s results for the quarter were above most other retailers. How was it possible?

High inflation is costing the typical American household several thousand dollars more than just last year. Since wage increases have not followed, this has eaten away at most households’ discretionary income.

What makes Williams-Sonoma unique is the profile of its customers. Because its products mostly appeal to economically upper-class households, demand has remained strong. Indeed, higher prices at the pump and at the grocery store have less of a negative impact on the discretionary income of those at the top of the economic ladder. That’s how Williams-Sonoma’s comparable brand revenue jumped 11.3% year-over-year.

The company’s diluted earnings per share (EPS) climbed 20.6% to $3.87 in the quarter. Rising costs actually caused Williams-Sonoma’s net margin to fall 14 basis points from a year earlier, to 12.5%. However, a 9.8% drop in the company’s outstanding shares to 69.1 million due to share buybacks more than offset this slight drop in profitability.

Along with share buybacks, continued investment in the company’s existing brands and acquisitions will increase the company’s market share in the door-to-door retail market by $830 billion.

Image source: Getty Images.

Dividend may continue to accrue

Investors focused on passive income will appreciate that Williams-Sonoma’s 2.3% dividend yield is significantly higher than the 1.7% average yield of the S&P 500 Index. And the icing on the cake is that there is plenty of room for future growth in the payment, which has already been growing every year for over a decade.

Williams-Sonoma’s dividend payout ratio is just 18% and dividend growth is expected to slightly outpace earnings growth for the foreseeable future. That’s why I expect high single-digit annual dividend growth over the next few years.

A wonderful company at a reduced valuation

The fundamentals of Williams-Sonoma are solid. Still, the market doesn’t seem to fully appreciate the stock.

Its forward price-to-earnings (P/E) ratio of 8.1 is below the luxury industry average of 10. This makes the dividend stock a terrific buy for dividend growth investors.

Kody Kester holds positions at Williams-Sonoma. The Motley Fool fills positions and recommends Williams-Sonoma. The Motley Fool has a disclosure policy.

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