Experiencing a great start to 2019, the Harvey Norman Holdings Limited (ASX: HVN) share price is up 20% since January.
Harvey Norman is an Australian based retailer with international operations. The operations exist primarily as franchises, with the brand name and company-operated stores owned by Harvey Norman Holdings.
From the 2018 financial report, Harvey Norman showed a decrease in profit after tax by 16% to $380 million. This 16% decrease also carried over to its earnings per share, dropping it from 40.35 cents to 33.71 cents. A reason for Harvey Norman's underperformance was due to growing competition and the continual rise in online purchasing. This resulted in the reduction of Harvey Norman's franchise fees which reduced franchising profits by 7.2%.
Due to Harvey Norman's extensive investment in its property portfolio, the 2018 domestic housing slowdown also contributed to its underperformance.
Why has Harvey Norman's share price continued to rally?
Despite the underperformance in 2018 which sent Harvey Norman's share price to 2014 levels, it has been steadily increasing since.
From the recent half-year report, Harvey Norman recorded growth of 7% in its profit after tax compared to the previous half-year. This was supported by the strong performance in its overseas stores which achieved a record-breaking, retail sales revenue of $1 billion. The total overseas retail profit has increased by 632% in the last five years and continues to look attractive. Harvey Norman is planning to open 18 additional stores overseas in the next couple of years due to strong demand.
Harvey Norman is currently trading at a PE of 10.7 which is a significant discount compared to an industry PE of 42.1. The total debt to equity that Harvey Norman carries is 31.79% which should allow it to take on more debt to grow future earnings.
Dividend cuts could have strong effects on Harvey Norman's share price
A ratio that potential investors should watch is the dividend payout of Harvey Norman. Currently, it sits at 89.04 which places significant pressure on the company to deliver strong earnings in future announcements. If overseas growth happens to slow, dividend cuts could be initiated which will impact Harvey Norman's share price.
Foolish takeaway
Harvey Norman pays a strong dividend and currently shows growth in offshore markets. With a slowing domestic economy, Harvey Norman has a valuable hedge which could show in the upcoming annual reports. Provided Harvey Norman can maintain strong revenue streams from overseas, a dividend cut shouldn't be imminent.
