2 Things Staples Dividend Investors Need to Know

With sales suffering, Staples' stock has fallen 25% year to date. That's pushed up the yield on the company's dividend, which now stands at 4%. That's a solid yield, and dividend investors have likely been tempted into the business, if only for the headline rate. However, Staples has some fundamental concerns that might make investors think twice about going all in on the retailer.

Staples has managed to keep the lights on.

Cash flows, future payments, and the need for the business to focus on other areas all complicate matters for the company. Here are the two biggest things that investors need to know when investing in Staples.

Cash at Staples is tight
Right now, Staples is paying out $0.12 per share, per quarter as its dividend. That's level with this time a year ago, as the company is trying to manage its limited cash with its commitment to shareholders. In a conference call at the beginning of the year, management said that it was going to maintain its "commitment to the dividend ," but noted that it was taking a fair chunk out of the company's cash.

Cash is king across the world and Staples is running shorter than hoped. In the last six months, the company has generated free cash flow of $193 million, but has spent $154 million on dividend payments.

That explains Staples' desire to keep payments level with last year, as any more would put a serious strain on the balance sheet. As it is, Staples has had to dip into its reserve to spend $126 million on share repurchases this year. The company still has $452 million authorized to spend on more buybacks, but it seems unlikely that much of that is going to be exercised in the near future.

For investors, the problem is the payment cap that Staples seems to be approaching. Without more cash to payout, the payments will have to stop growing or stop being paid out. Since Staples has made returning shareholder cash a focus of its strategy, it seems unlikely that the company would stop paying altogether, but $0.12 might be the norm for the foreseeable future.

Staples has plenty of room to grow
Even though things look a little dire on the cash side, Staples is by no means a beaten business. The company's sales have fallen slightly this year, but it has a plan in place to get back on track. Right now, Staples is cutting down on its store footprints, reducing its retail costs, and closing under-performing locations.

That swap from big box style to smaller retailer is being accompanied by an investment in online sales and functionality. Earlier in the year, Staples acquired PNI Digital Media for $67 million. PNI operates a software platform that allows customers to make customized prints and business products, giving Staples a way to engage online shoppers even more.

On top of the PNI acquisition, Staples is integrating its online business and its physical locations by offering 'ship to store' and online returns in-store. Those sorts of programs not only increase sales, but get customers who normally shop online to come into a store, perhaps adding to their purchase while there.

Staples has yet to make these programs a success, though, and same store sales were down 5% in North American stores for the first half of 2014. The company clearly has work that needs to be done, again hinting at a cap in the dividend payment for some time to come.

Looking ahead for Staples
While Staples may have some cash issues, there's no doubt that it's going to be a player in the retail world for years to come. The concern that dividend investors should have is how consistent the business can be in its dividend payments and increases if it has years of reinvention and investment ahead of it. I do like the 4% yield, but given the shaky nature of the company's revenue, I'd be hard pressed to put all my eggs in this basket.

Staples looks like a company with a lot of upside, but, especially for dividend investors, there's a lot that could still go wrong. Tread carefully.

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The article 2 Things Staples Dividend Investors Need to Know originally appeared on Fool.com.

Andrew Marder has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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