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After only a week’s hiatus since its earnings release on February 29, Staples Inc. (SPLS - Analyst Report), the global leader in the supply of office products, announced a dividend hike.

Up Goes Dividend

The Farmington, Massachusetts-based company, Staples, raised its annual dividend by 10% to 44 cents (or 11 cents quarterly) from 40 cents a share (or 10 cents quarterly). The company announced that the increased dividend will be paid on April 12, 2012, to stockholders of record on March 23, 2012.

However, the news did not provide much impetus to the stock, as the share price of Staples rose 2.1% or 31 cents to close at $15.36 on Tuesday. The dividend yield based on the new payout and the last closing market price is 2.9%.

In March 2011, Staples, an S&P 500 company, last hiked its dividend to 40 cents from 36 cents, reflecting an increase of 11%.

Financials in Support

Staples’ commitment towards increasing shareholders’ return reflects its free cash flow generating capability, sound liquidity position and defined future prospects. During fiscal 2011, the company generated free cash flow of $1,192.8 million and ended the year with cash and cash equivalents of $1,264.1 million. Management projects free cash flow generation of over $1 billion in fiscal 2012.

Role of Dividend

Increasing dividend is becoming a trend these days, mostly followed by companies that boast of a stable cash position and healthy cash flows. These strategies not only enhance shareholders’ return but also raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them.

Perhaps, a hike in dividend appears to be one of the best tools to win the hearts of the investors, who now prefer to move to a safe heaven, in an economy that is still struggling to recover. Investors, in order to shield themselves from the upheavals that the financial world is susceptible to, are now diligently choosing their portfolio of stocks that can give them the best returns. On that note, while building the portfolio, underlining dividend growth potentiality plays a vital role.

Closing Comment

Staples is better positioned compared to its competitors in sustaining its growth momentum based on margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

Moreover, the company’s strategic alliances with Martha Stewart Living Omnimedia Inc (MSO - Snapshot Report) and Avery Dennison Corporation’s (AVY - Analyst Report) office and consumer products group for retailing a new product line for the home office, is a smarter move as the decline in business and consumer spending and weak credit markets have reduced the demand for big-ticket items, such as business machines and other durable products.

Currently, we have a long-term “Neutral” recommendation on the stock. Staples, which competes with Office Depot Inc. (ODP - Analyst Report) and OfficeMax Inc. , holds a Zacks #3 Rank that translates into a short-term “Hold” rating.

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