Ethan Allen Interiors: A Reliable Dividend Payer with Undervalued Growth Potential

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Written By Joel Gbolade

Ethan Allen Interiors has been consistently underestimated by the market despite its impressive economic profitability over the last five years. The market’s valuation of Ethan Allen suggests a decline in economic profitability, even as the company’s economic performance has accelerated.

Not only does the market hold an overly pessimistic view, but Ethan Allen also stands as a very safe source of dividend income, with the firm generating significantly more free cash flow than it pays out in dividends.

Business Model


Ethan Allen is a global, vertically integrated interior designer, manufacturer, and retailer specializing in home furnishings. The company operates across the entire value chain from product design to home delivery. Known for its high level of craftsmanship and personalized service, Ethan Allen offers a high-end and stylish user experience.

The company’s products are sold in the United States and internationally through its brick-and-mortar design centers and online store. These design centers include both independent licensees and company-operated locations.

As of June 30, 2023, Ethan Allen operated 139 retail design centers in North America, with 135 in the United States and four in Canada. The company also runs ten manufacturing facilities in the United States, Mexico, and Honduras.

With three-quarters of its products manufactured in North America, the firm collaborates with partners in Europe, Asia, and other regions to support its business.

Growth with Profitability

Between 2020 and the trailing twelve months (TTM), Ethan Allen’s revenue grew from $589.84 million to $664.96 million, compounding at an annual rate of 2.43%. However, to get a clearer picture of the firm’s profitability, it’s essential to consider net operating profit after tax (NOPAT), which excludes non-operating items and other material items off the financial statements.

Using this methodology, NOPAT rose from $11.99 million in 2020 to $67.97 million in the TTM, compounding at an impressive rate of 41.48% annually.

This increase in NOPAT was driven by rising NOPAT margins, which improved from 2.03% in 2020 to 10.22% in the TTM. Additionally, the company’s average invested capital turns (revenue/average invested capital), a measure of balance sheet efficiency, improved from 0.93 in 2020 to 1.01 in the TTM.

Ethan Allen’s Competitive Advantage and Rising ROIC

Long-term market valuations are influenced by returns on invested capital (ROIC). Using the methodology from New Constructs, I calculated that Ethan Allen’s ROIC rose from 1.89% in 2020 to 10.30% in the TTM, indicating a significant improvement in capital efficiency.

Ethan Allen’s rising NOPAT margins are crucial for maintaining its competitive edge against rivals such as Hooker Furnishings (HOFT), Bassett Furniture Industries (BSET), RH (RH), Haverty Furniture (HVT), and La-Z-Boy (LZB). This pricing power is a testament to its strong market position.

A Safe Source of Dividend Income

Ethan Allen’s free cash flow (FCF) grew from $11.99 million in 2020 to $24.07 million in the TTM, with a cumulative FCF of $326.49 million, compared to a market capitalization of $698.06 million. This means the company has generated 46.77% of its market capitalization in FCF.

The FCF yield (FCF/enterprise value) has also remained attractive, rising from 2.84% in 2020 to 3.02% in the TTM. The company has paid out $208.86 million in dividends during this period, indicating substantial room for future dividend increases, making it a very attractive option for dividend-seeking investors.

Attractive Valuation

Stock prices reflect expectations about future cash flow growth. A firm’s economic book value (EBV), analogous to its intrinsic value, represents the value of its cash flows based on current operations. Ethan Allen’s EBV per share has been significantly higher than its stock price since 2021, suggesting the market expects a decline in economic profitability.

However, the firm’s consistent NOPAT growth contradicts this pessimistic view, and the market’s expectations are beginning to adjust.

Reliable Dividend Payer


Ethan Allen Interiors is a straightforward business that has consistently been underestimated by the market. Despite modest revenue growth, the firm has significantly increased its NOPAT through improved NOPAT margins and capital efficiency. This has been reflected in a sharp rise in ROIC.

The company generates substantial FCF, making it a reliable source of dividend income. Given its attractive valuation and the market’s unfounded pessimism, Ethan Allen presents a compelling investment opportunity.


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