Cato (NYSE:CATO) versus GAP (NYSE:GAP) Critical Comparison

GAP (NYSE:GAP) and Cato (NYSE:CATO) are both retail/wholesale companies, but which is the better investment? We will contrast the two companies based on the strength of their valuation, analyst recommendations, dividends, risk, profitability, institutional ownership and earnings.

Dividends

GAP pays an annual dividend of $0.66 per share and has a dividend yield of 3.2%. Cato pays an annual dividend of $0.51 per share and has a dividend yield of 18.1%. GAP pays out 28.6% of its earnings in the form of a dividend. Cato pays out -37.8% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. GAP has raised its dividend for 1 consecutive years. Cato is clearly the better dividend stock, given its higher yield and lower payout ratio.

Institutional & Insider Ownership

58.8% of GAP shares are held by institutional investors. Comparatively, 61.1% of Cato shares are held by institutional investors. 31.0% of GAP shares are held by company insiders. Comparatively, 18.1% of Cato shares are held by company insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock is poised for long-term growth.

Analyst Recommendations

This is a summary of current ratings and recommmendations for GAP and Cato, as reported by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
GAP	0	7	8	0	2.53
Cato	0	0	0	0	0.00

GAP currently has a consensus price target of $27.9333, suggesting a potential upside of 35.14%. Given GAP’s stronger consensus rating and higher possible upside, equities analysts plainly believe GAP is more favorable than Cato.

Profitability

This table compares GAP and Cato’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
GAP	5.80%	27.86%	7.51%
Cato	-4.02%	-14.71%	-5.80%

Risk & Volatility

GAP has a beta of 2.15, meaning that its stock price is 115% more volatile than the S&P 500. Comparatively, Cato has a beta of 0.85, meaning that its stock price is 15% less volatile than the S&P 500.

Earnings & Valuation

This table compares GAP and Cato”s revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
GAP	$15.09 billion	0.52	$844.00 million	$2.31	8.95
Cato	$642.95 million	0.09	-$18.06 million	($1.35)	-2.09

GAP has higher revenue and earnings than Cato. Cato is trading at a lower price-to-earnings ratio than GAP, indicating that it is currently the more affordable of the two stocks.

Summary

GAP beats Cato on 14 of the 17 factors compared between the two stocks.

About GAP

Gap, Inc. operates as a global apparel retail company, which offers clothing, apparel, accessories, and personal care products for men, women, and children. The firm operates through the following segments: Gap Global, Old Navy Global, Banana Republic Global, Athleta, and Other. The Gap Global segment includes apparel and accessories for men and women under the Gap brand, along with the GapKids, BabyGap, GapMaternity, GapBody, and GapFit collections. The Old Navy Global segment offers clothing and accessories for adults and children. The Banana Republic Global segment provides clothing, eyewear, jewelry, shoes, handbags, and fragrances. The Athleta segment offers fitness apparel for women. The company founded by Donald G. Fisher and Doris F. Fisher in July 1969 and is headquartered in San Francisco, CA.

About Cato

The Cato Corporation, together with its subsidiaries, operates as a specialty retailer of fashion apparel and accessories primarily in the southeastern United States. It operates through two segments, Retail and Credit. The company's stores and e-commerce websites offer a range of apparel and accessories, including dressy, career, and casual sportswear; and dresses, coats, shoes, lingerie, costume jewelry, and handbags, as well as men's wear, and lines for kids and infants. It operates its stores and e-commerce websites under the Cato, Cato Fashions, Cato Plus, It's Fashion, It's Fashion Metro, and Versona names. It also provides credit card services to its customers, as well as layaway plans for customers. The Cato Corporation was incorporated in 1946 and is headquartered in Charlotte, North Carolina.