Rent-A-Center Inc. (RCII) in its attempt to optimize its shareholders’ return decided to employ its available free cash in raising its quarterly dividend.
The rent-to-own operator raised its quarterly dividend by a whooping 167% to16 cents from 6 cents. The increased dividend will be paid on July 20, 2011to stockholders of record as of July 01, 2011.
The dividend increase reflects the company’s sound financial position and well-defined future prospects. The signs of recovery in the economy have made share buybacks and dividend increase a common factor among companies sitting on extra cash. These strategic initiatives enhance shareholders’ return and lift the market value of the stock.
Rent-A-Center is one of the largest rent-to-own operators in the U.S.and leverages an extensive network of about 3,000 stores to effectively penetrate its target markets, and gain a competitive advantage over its competitors Aaron’s Inc. (AAN) and Advance America.
The company is taking prudent steps to optimize rental merchandise levels in accordance with the sales trends. Rent-A-Center implemented a centralized inventory management system, including automated merchandise replenishment. Moreover, a new centralized purchasing system allows it to better manage the rental merchandise.
Earlier, the company reported lower-than-expected first-quarter 2011 results. The quarterly earnings of 79 cents a share missed the Zacks Consensus Estimate of 85 cents, increasing 2.6% from 77 cents registered in the prior-year quarter.
The quarterly earnings also failed to meet management’s guidance range of 82 cents to 88 cents a share.
Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 3.3% to $742.2 million from the year-ago quarter. The increase in revenue was attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business. However, total revenue fell short of the Zacks Consensus Estimate of $753 million. Besides, comparable-store sales for the quarter came in at 0.1%.
The company’s new business model named RAC Acceptance is gradually gaining traction. When a consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.
Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks, and consequently provides an upbeat guidance. The company also hinted that it has been evaluating strategic alternatives for its financial services’ businesses, which may or may not include the divestiture of the segment.
Rent-A-Center offers consumer electronics, appliances and furniture products under rental-purchase schemes that allow the customer to own the merchandise on the completion of the rental period. Due to the continued tightening of the credit market, customers witness rent-to-own as a more flexible and viable option compared to credit. However, the sluggish recovery and a fragile job market may make customers reluctant to enter into the new rental purchase deals.
Currently, we have a ‘Neutral’ rating on the stock. However, Rent-A-Center’s shares maintain a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
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