In general, big, well-known brand names and their underlying
company owners throw off ample and steady cash flow. Hefty profit
margins frequently result from the well-run firms, and also allow
for equally generous dividend payouts to shareholders. However, a
number of big brands pay dividends and probably shouldn't be. Below
are four that should consider cutting them altogether.
Back in January 2008, mobile phone maker Nokia (
) boasted a global market share of 40%. At that time, it had just
closed out a successful year that saw fourth quarter profits jump
44% in important emerging markets, including China and parts of
Africa. Nokia was riding high with popular phones and a global
distribution system that was seen as very difficult to compete
Fast forward more than four years and Nokia's global market
share has plummeted by about half. More alarmingly, its share of
the smart phone market is in the single digits. Last year, it
reported a loss of more than 1 billion Euros and free cash flow of
only about 0.19 Euros per share. These earnings fell well below the
0.33 Euros per share in dividend payments to shareholders. Its
current dividend yield is well over 9%, but should be cut so that
the company can better ensure its survival as the market continues
to shift to smartphones.
2. Avon Products
Avon Products (
) possesses a solid business model that focuses on selling
cosmetics and related consumer products to customers through a
direct selling model that relies on an independent sales force.
This model skips the traditional retail channel and a middle man
that takes a cut of the profits. However, its now former CEO
oversaw a terrible operating period that saw sales grow only
modestly but profits plummet nearly 17% annually over the past
Avon can regain its former glory, but needs to repay debt and
may have major fines over ongoing bribery allegations of foreign
officials in some of the overseas markets it operates in. It has
also seen some bad debt expenses and has seen operating cash flow
increasingly eaten up by higher spending, which hasn't resulted in
steadily increasing sales. Shareholders would be better off seeing
the current dividend yield of 5.6% cut so that Avon can get its own
house back in order.
3. Best Buy
Electronics retailing giant Best Buy (
) has a leading brand name but has been making headlines for the
wrong reasons lately. Its founder, who remains one of its largest
shareholders, recently offered to take the company private. This
move stems over management turmoil and turnover as the company
struggles for relevancy in the face of intense online competition
from the likes of Amazon and eBay.
Best Buy's current profit levels easily cover its current
annualized dividend payout of 68 cents per share (or 3.8% yield).
However, sales growth is expected to be flat at best over the next
couple of years, as will projected profit growth. The key concern
is that television and multimedia offerings such as music, movies,
and video games continue to migrate online and eliminate a number
of very important sales drivers at Best Buy. With such an uncertain
future, Best Buy may also want to play it conservative and conserve
cash to better ensure its future.
Fast food leader Wendy's (
) has a brand known for quality food and consistent service.
However, in recent years it has allowed its store base to grow old
and stale. A new management team will be making up for lost time
and plans to double spending on company owned stores to refurbish
old ones, and even knock down some to replace them with more
efficient and modern locations.
Capex is projected to exceed $225 million in the next year or so
and will likely result in negative free cash flow. Wendy's is
currently only paying out 8 cents annually in a dividend for a
yield of 1.8%, but there is really no need for it to be paying out
anything given the major investments needed in refreshing its
restaurants over the next few years.
No Company, No Dividend
Some of above firms that are struggling for survival should
seriously consider cutting their dividends completely. Others may
simply want to take the conservative route and conserve capital. At
the end of the day, income-minded investors may jump ship, but the
economics of their current operations suggest dialing back the
current dividend payouts.
At the time of writing, Ryan C. Fuhrmann did not own shares
in any company mentioned in this article.
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