L Brands’ (LB ) stock, a member of the Wilshire 5000 Total Market Index, has struggled this year, declining 56.1%. After such a drastic drop, are shares of L Brands a bargain today? Let’s look at the company’s background, earnings results and dividend to see.

Company Background

L Brands was born in 1963 as “The Limited”.  By 1976, The Limited had opened 100 stores around the U.S. In 1982, the company made perhaps its most important purchase when it added Victoria Secret for the small sum of $1 million. Today, L Brands, which also include Bath & Body Works, has a market cap of $7.3 billion.

2^nd Quarter Earnings Results

L Brands released 2^nd quarter earnings results on August 22^nd.  The company earned $0.36 per share, topping analysts’ expectations by $0.02. This, however, was a 25% decline from the 2^nd quarter of 2017.  Revenue increased 8% to $2.98 billion, beating estimates by $50 million.

Comparable same-store sales companywide increased 3% during the quarter, compared to an 8% decline in second quarter of the previous year. Victoria Secret grew of 1% to nearly $1.4 billion.  While the physical stores had anemic growth, Victoria Secret Direct, L Brand’s direct to consumer program, saw sales climb 22% to $360 million.

While Victoria Secret has weighed down results for L Brands, the company’s Bath & Body Works division continues to shine. In the 2^nd quarter, Bath & Body Works saw revenue increase 9.5% to $825 million.  Bath & Body Works direct to consumer line also showed strong growth, improving 30% to $1.39 million year over year.

International sales for L Brands improved almost 28% as the company continues to pursue store openings in countries around the world. China is one area where L Brands is trying to expand, having already opened seven stores and looking to add as many as ten more in the country this year.

While direct to consumer and international sales accounted for just 21.6% of sales in the most recent quarter, the growth rates are very high. This shows that management has made the correct decision in focusing on e-commerce as a way to drive revenue gains.

That being said, L Brands is spending heavily to build out their e-commerce, which is weighing on results. Despite a second-quarter earnings beat, L Brands reduced their earnings per share guidance for the second time in 2018. The company now expects to earn a $2.58 per share at the midpoint, down from $2.85 previously.

Based off of the August 31^st closing price of $26.43, L Brands has a forward price to earnings multiple of 10.2. This is well below the stock’s five-year average P/E of 18.4 as well as the Wilshire 5000’s P/E of 25.6. Shares have declined 58.1% from their 52-week high of $63.10.

Is the Dividend Safe?

L Brands hasn’t reduced its dividend payment to shareholders over the last decade, but it has paused its growth several times (2008-2010, 2015-2018).  Even so, the company has had a dividend compound annual growth rate of nearly 15% over the last ten years. The stock currently yields 9.08%, well above the yield of both the Wilshire 5000 (1.88%) and the 10-Treasury Bond (2.86%).

Based off of expected earnings and the $2.40 in dividend payments for the year, L Brands has a payout ratio of 93%. That is a dangerously high ratio, especially since the company keeps lowering its own earnings expectations. According to Value Line, the average payout ratio from 2008-2017 was slightly more than 49%.

This means that the company’s payout ratio is well above its normal range. Investors counting on L Brands for its yield could find that the company cuts its dividend in order to reinvest in the business. If the company were to adjust its dividend to be more in line with its historical payout ratio, L Brands’ yield would still be 4.8%.

Conclusion

L Brand’s 2^nd quarter was solid. Growth at Victoria Secret was muted, but that is better than the division’s’ previous quarterly performance. Bath & Body Works continues to produce solid results with nearly 10% revenue growth. Direct to consumer continues to accelerate, posting strong growth rates for both Victoria Secret and Bath & Body Works. While physical stores in the U.S. are struggling, overseas markets, especially in China, remain largely untapped.  For the investor with a higher appetite for risk, L Brand’s e-commerce growth and dividend yield might be an attractive opportunity.