Having fallen by more than 20 per cent from recent highs, Harvey Norman (ASX:HVN), one of Australia’s largest and best-known retailers, is offering a yield exceeding 7 per cent. That is attractive by any standard but the sustainability of that yield has been brought into question, with moderation in the housing cycle and the looming threat of Amazon’s entry into the Australian market at the forefront of investors’ minds.

Figure 1. Key Ratios – Dividends
Source: StocksInValue
The concern around a slowing housing market is warranted and will likely depress like-for-like sales growth in Australia, but HVN may find some reprieve in the strengthening renovations cycle. With respect to Amazon and e-commerce more generally, HVN will likely face long-term structural headwinds as more consumers shift their buying online, particularly in electronics. With that being said, many of HVN’s products are either bulky like furniture or TV’s or high value (such as computers) and hence require in-store interaction. As a result, HVN is not powerless to respond to the threat of online retail, and can shift its product mix to more defensive categories over time.
It is also important to understand that HVN’s value includes a significant property backing of about $2.34 per share, more than half the current share price. This provides significant downside protection in the event of massive disruption to the business model. Yet with that said, the business is not struggling, with growth rates consistently above the broader retail sector. Its most recent update for the 10 months to April 2017 showed like-for-like sales growth of 4.8% in Australia, which was below market expectations but solid in its own right. Ultimately, how attractive HVN is as a yield stock will depend on the investor’s individual views on the housing market and Amazon, two emotive subjects with a very wide range of opinions.

Figure 2. Key Ratios – Financial Strength

Source: StocksInValue
At current prices, HVN appears undervalued, though risks are to the downside in terms of its earnings outlook given slowing housing activity and patchiness in retail generally. At this point in the cycle, it is not something you can simply put in your portfolio to collect a yield – and that may be enough to turn some investors off. But for those attracted to the underlying business, HVN is a well-diversified, well-managed retailer with a strong network, excellent brand and growing footprint. It has a proven track record and attractive fundamentals, as shown in the financial summary below. Nevertheless, it is facing legitimate challenges and is trading at a discount to its FY18 intrinsic value of around $4.50 as a result.

Figure 3. Financial Summary
Source: StocksInValue