Are These Sports Retailer Dividend Stocks Safe?

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In 2016, brick-and-mortar sports retailers got a windfall as several chains went out of business. Survivors like Dick's Sporting Goods, Foot Locker, and Big 5 Sporting Goods picked up the slack and saw their shares race higher. Then 2017 happened.

After stock price declines, these three retailers now pay an attractive dividend yield. Investors should be weary, though, as that alone may not warrant a purchase.

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What happened last year?

After the windfall in 2016 for surviving sports retailers, investors realized that a consolidating retail industry would only go so far to help the traditional store. Online-only competition continued to grow at a double-digit pace in 2017 and encroached on the turf of traditional sporting goods retailers.

Same-store sales, an important metric that measures foot traffic and value of merchandise purchased, declined for all three chains. Dick's, Foot Locker, and Big 5 had annual same-store declines of 0.3%, 3.1%, and 1.2%, respectively.

The same-store sales numbers were especially bad during the important holiday shopping season. Dick's fourth-quarter comps fell 2% compared to the prior year. Foot Locker's fell 3.7%, and Big 5 had a 9.4% drop it chalks up to warmer than usual weather that negatively impacted sales of winter gear.

Which companies are in good shape?

Dick's and Big 5 continue to expect same-store sales to fall slightly in 2018. Big 5 management, though, told investors to expect a high single-digit drop once again to kick off the new year. Foot Locker also sees some comparable sales declines, but thinks the trend should begin to reverse by the middle of the year. As a result of the declines, each store has seen its free cash flow fall as of late. Free cash is important as dividends are usually paid out of that.

Though it has an attractive looking 8.8% payout, Big 5's dividend is likely too good to be true. It is not sustainable if the chain can't reverse its current course. Dick's and Foot Locker, on the other hand, are able to cover their dividends with free cash even though profitability took a hit last year. Both also increased their payout last year -- Dick's is doling out a 32% increase and Foot Locker an 11% increase in their quarterly paydays to investors.

There has been negativity around the industry, but Dick's and Foot Locker are still projecting confidence as their online sales continue to increase. Both have had success in rolling out exclusive sports apparel and equipment to give shoppers a reason to come back to their stores. Big 5 has a negligible online presence and relies on sales of commoditized merchandise. Based on that, Dick's and Foot Locker look like safe dividends at the moment -- Big 5, not so much.

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Nicholas Rossolillo and his clients own shares of Dick's Sporting Goods. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.