Is La-Z-Boy's Dividend-Driven TSR Outperforming Its Earnings Decline a Buy Signal?

In the world of value investing, dislocations between a company's fundamentals and its market valuation often signal opportunity. La-Z-Boy (NYSE: LZB) presents a compelling case: over the past three years, its total shareholder return (TSR) has surged 40%, driven by a 2.28% dividend yield and aggressive share repurchases. Yet, beneath this surface, the company's earnings per share (EPS) have declined by 11% annually, and revenue fell 6.8% in recent periods. For contrarian investors, this divergence raises a critical question: Is La-Z-Boy's dividend-driven TSR masking structural weaknesses, or is it a sign of undervaluation that could reward long-term income-focused investors?

The Contrarian Case for La-Z-Boy

La-Z-Boy's financials tell a story of resilience amid macroeconomic headwinds. Despite a 6.8% revenue decline in the most recent period and a 11% annual EPS drop, the company generated $187 million in operating cash flow and $113 million in free cash flow in fiscal 2025. This cash flow has been reinvested into the business and returned to shareholders through a 10% dividend increase and $78 million in share repurchases. The result? A 40% TSR over three years, outpacing its 31% share price return alone.

The key to understanding this dislocation lies in La-Z-Boy's balance sheet. With $328 million in cash and no external debt, the company has the flexibility to sustain its dividend and repurchase program even as earnings falter. Its payout ratio of 36.6% is conservative, and its 4.44% total shareholder yield (combining dividends and buybacks) suggests management is prioritizing capital returns. For income investors, this creates a paradox: a company with declining earnings is still generating reliable, growing income for shareholders.

Earnings vs. TSR: A Tale of Two Metrics

The disconnect between La-Z-Boy's earnings and TSR is not uncommon in cyclical industries. The company's wholesale segment, which accounts for 60% of revenue, has faced margin compression due to international customer transitions and supply chain costs. Meanwhile, its retail segment, now 55% company-owned, has expanded aggressively, opening 11 new stores and acquiring seven independent outlets in fiscal 2025. This strategic shift has boosted top-line growth but masked underlying profitability challenges.

Critics argue that La-Z-Boy's earnings decline reflects structural issues, such as the 21% drop in Joybird's sales and the $20.6 million goodwill impairment in the UK. However, these charges are largely non-recurring and reflect management's willingness to take short-term hits for long-term gains. The company's adjusted operating margin of 7.6% in fiscal 2025, down just 20 basis points from the prior year, suggests that core operations remain stable.

Is This a Buy Signal?

For contrarian investors, La-Z-Boy's current valuation offers a unique opportunity. At a price-to-earnings (P/E) ratio of 12x (based on adjusted EPS of $2.92) and a forward P/E of 10x, the stock trades at a discount to its historical average of 15x. This discount reflects market skepticism about its earnings trajectory but overlooks the company's strong cash flow and disciplined capital allocation.

The risks are clear: if high mortgage rates and weak housing demand persist, La-Z-Boy's retail same-store sales could continue to decline. Additionally, the Joybird segment's struggles highlight the challenges of e-commerce in a fragmented market. However, these risks are already priced into the stock, and the company's 4.44% total shareholder yield provides a buffer against further declines.

Investment Thesis

La-Z-Boy's dividend-driven TSR is not a mirage—it is a calculated response to a challenging environment. By returning 30% more capital to shareholders in fiscal 2025 compared to 2024, management has signaled confidence in the company's ability to navigate macroeconomic volatility. For long-term income investors, this represents a rare combination of yield and growth potential.

The contrarian case hinges on two assumptions:
1. Earnings will stabilize as supply chain costs normalize and the UK business integrates.
2. The market will eventually recognize the company's strong cash flow and disciplined capital returns, narrowing the gap between TSR and fundamentals.

While not without risk, La-Z-Boy's current valuation and shareholder-friendly policies make it a compelling addition to a diversified portfolio. Investors willing to look beyond short-term earnings declines may find a durable income stream and long-term capital appreciation in this overlooked name.

Final Verdict: For those with a 5–10 year horizon and a tolerance for near-term volatility, La-Z-Boy's dislocation between earnings and TSR could be a compelling entry point. The key is to monitor the company's ability to execute its Century Vision strategy and maintain its dividend growth trajectory. If successful, the rewards could outweigh the risks.