Best Buy: Stock of the Week

How many electronics retailers act like an income stock and offer a healthcare service? 

Andrew Willis 20 March, 2023 | 4:59AM
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Andrew Willis: From healthcare to high dividends, Best Buy (BBY) is pulling out all the stops when it comes to recovering and surviving in a tough macroeconomic environment.

Electronics aren’t at the top of shopping lists these days as consumers cut unnecessary electronics from tight budgets and competition between retailers is heating up. So Best Buy is expanding its business with customers through paid programs like Best Buy Health and Best Buy Total Tech, or Geek Squad Home Membership in Canada.

Equity analyst Sean Dunlop says the Best Buy Health offering is intriguing. That business focuses on assistive electronic devices, home installation and monitoring, with customer demand that’s less sensitive to price changes. Best Buy has also partnered with 5 of the 10 largest health systems in the U.S. to provide remote healthcare monitoring services.

The evolution in the electronic retail space is progressing at a dizzying pace, says Dunlop, but Best Buy is taking adequate steps to shore up the competition – and keep investors happy. We agree with the company’s buybacks and dividends, which we predict will amount to around US$3.7 billion in share repurchases and US$4.4 billion in dividends through to 2028. The latter should help maintain the 4.28% twelve-month trailing yield we’ve seen so far.

For Morningstar, I’m Andrew Willis.

bulls Bulls Say

  • With digital sales volumes projected to equilibrate at roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online competitors.
  • Improving route densities should strengthen the margin profile of small parcel e-commerce sales, with 35% of store "hubs" now accounting for 70% of ship-from-store volume.
  • The paid Totaltech loyalty program should increase touchpoints with the firm’s best customers, increasing spending and frequency relative to pre-program behavior.

bears Bears Say

  • Service and accessory attach rates remain higher in in-store channels, posing a modest headwind as the digital mix remains permanently higher.
  • Vendor concentration could result in softening wholesale discounts, lower vendor allowances, or worse product availability over time, particularly if the direct-to-consumer channel continues to grow for key suppliers.
  • The U.S. retail industry remains overbuilt, with the consumer electronics category seeing average square footage declines--and aggregate offline sales declines--in the low single digits annually.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Best Buy Co Inc75.68 USD1.79Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.