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Kohl's Stock Shows Strength Despite Options Volume Spike

Recent options trading activity suggests mixed investor sentiment for Kohl's Corp (KSS), currently priced at $20.18. The stock has climbed slightly since Q2 earnings, buoyed by a high dividend yield of nearly 10%. However, concerns about its dividend sustainability linger.

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AI Rating:   5

The report details a significant spike in unusual options volume for Kohl's Corp (KSS), indicating heightened investor activity. The stock, currently priced at $20.18, represents a 2.7% gain from its price at the end of August ($19.65). This trend could be attributed to the company's attractive dividend yield of almost 10%, drawing investors despite the ongoing concern about a potential recession.

Unusual Options Activity

There is a noteworthy volume of both put and call options, suggesting investors are making strong forecasts about the stock's performance in the coming weeks. The record of over 20,000 put contracts at the $17.50 strike price indicates bearish sentiment among some investors, potentially betting on a decline in KSS's stock price. Conversely, over 21,000 calls traded at a $21.00 strike price indicates some investors are optimistic about a slight rise in the stock value.

Dividend Security

Kohl's management has stated a commitment to maintaining its dividend, which is a crucial point for the stock's appeal. However, the analysis shows that the free cash flow (FCF) was insufficient to cover the dividend payments in the first half of 2024. KSS generated an operating cash flow of $247 million, while the dividend cost was $111 million, leading to a thin FCF of only $8 million. This raises questions about the sustainability of the dividend amidst ongoing capital expenditures totaling $239 million.

Nevertheless, an evaluation based on the last twelve months (LTM) paints a more secure picture. The LTM FCF of $709 million is solid enough to cover the annualized $222 million cost of dividends and debt reduction payments. This analysis indicates the security of the dividend if assessed over a longer timeframe.

Projected Growth

With expectations for revenue of $16.1 billion next year, KSS is positioned to maintain a healthy FCF margin. Despite its current challenges, the anticipated future FCF suggests a continued ability to support dividend payments and debt repayments, allowing room for share buybacks. Analysts have different price targets for KSS, supporting the view that the stock could be undervalued at its current level.

Conclusion

Overall, while there are cautionary signs regarding the dividend sustainability and the unusual options activity reflects diverging investor sentiments, KSS remains an attractive candidate with secure long-term financial potential.

Stocks:  KSS