Coach Inc. (COH)

[free_bee]

Coach has historically increased its dividend in the May-June period and free cash flow supports a strong increase this year.

If cash is king, then Coach investors may soon love their monarchy

Shares trade for just 14.4 times trailing earnings, well below the industry average of 21.9 times and even below the stock's five-year average of 17.8 times earnings. Valuation multiples have many wondering if the shares could be a strong value play on a rebound though most are still hesitant of falling into a value-trap.

While I won't pretend to call a quick turnaround in the shares, there is one very strong reason for a long position.

Despite weakness in the shares and sales lost to competitors, free cash flow continues to increase even on higher capital expenditures. Free cash flow increased by 13% last year to $1.17 billion, even as the company increased capital spending to $241 million. Coach has increased free cash flow by a compound annual rate of more than 9% over the last five years.

The company has increased the dividend per share amount by a compound annual rate of 35% since it began making payments in 2009. Coach has purchased $2.2 billion of its own shares over the last three fiscal years and still has nearly $800 million of cash on the balance sheet.

The company has increased its dividend in the second quarter of every year since 2010. On annual free cash flow growth and previous increases, I am expecting an increase of at least 25% to be announced in May or June for an annual dividend of $1.69 per share and a 3.4% yield. On $1.69 per share for the remaining two payments this year, the company would be paying out approximately 37% of net income. Beyond the dividend increase, it's possible the company could also announce a more aggressive buyback program.

Coach has not been kind to shareholders over the last few years but that may soon change with more cash returned through dividends and a repurchase program. While it may still take a couple of years to see strong price appreciation on international growth, the attractive dividend yield and possible increase to the buyback program should provide decent returns until a turnaround is achieved.

http://seekingalpha.com/article/2111903-a-dividend-increase-could-send-this-laggards-shares-higher