Yahoo Finance Why Macy's should rattle investors by cutting its big dividend
It may be time for Macy’s (M) to look at itself in the mirror and ask one very simple question: is it time to cut the dividend (or scrap it entirely) and use that cash in more productive areas or save it for a rainy day?
Sure, Macy’s is a profitable retailer. And yes, it has a growing online business. There is no imminent cash crunch as the company still generates decent cash from its business and has done a good job paying down debt. So, there is no near-term debt maturities that would throw a wrench in Macy’s. And unlike Sears and J.C. Penney (JCP), Macy’s isn’t saddled with some really atrocious store locations and internal operating systems.
But given how Macy’s business has fared these past two years — generally pressured earnings and up and down same-store sales results — it could be time for the company to be proactive on the cash conservation front. Without question, an argument could be made that what the company saw in the second quarter — brutal sales and margin performances — are signs of things to come amid the shift to digital shopping.
It’s not as if the first half of this year has been stellar for Macy’s, either.
Where is it written that a retailer that relies essentially on one quarter to make its year (the holidays in the fourth quarter) must continue a dividend that has been in place for only 15 years? Nowhere. Times are changing, Macy’s must as well — no sacred cows.
A reason to cut the dividend
Macy’s stock now has a dividend yield of 9%, fueled in large part by the plunge in value over the past two years (down 24%). That is in distressed company land.
Macy’s did little in the second quarter to drive the narrative that it’s a healthy company that should be supporting that type of dividend yield.
Macy’s reported second quarter adjusted earnings of 28 cents a share, missing analyst forecasts for 45 cents a share. Earnings plunged from 70 cents a year ago. Same-store sales rose a meager 0.3%. Full-year earnings guidance was slashed to $2.85 to $3.05 a share from $3.05 to $3.25 previously.
The stock plunged more than 15% Thursday.
“While Macy's is gaining traction with its various initiatives, we remain sidelined given secular headwinds. We believe realizing sizable, sustainable margin gains may be challenging as Macy's invests in [long-term] initiatives,” said Jefferies retail analyst Randy Konik.
One retail expert Yahoo Finance talked with agrees there is no near term reason to cut the dividend. It would rattle the investor base, the source said. But they did acknowledge the outlook for the business is such that saving $463 million a year — which is Macy’s annual dividend payment —or even part of it wouldn’t be a bad thing at all.
“I think that is a possibility next year should top line and margins further deteriorate, but right now with the cost savings program being implemented I do not expect it,” another source told Yahoo Finance on the outlook for Macy’s dividend.
Looking ahead to the next 15 years
Not everyone on Wall Street thinks Macy’s dividend is at risk.
“We continue to believe M's dividend is secure (~9% yield), with M ~1.7x covered and a less than 60% payout ratio (on our 2020E estimates),” said Guggenheim Securities analyst Robert Drbul. “The company has also improved the balance sheet through debt repayments over the past 12 months.”
Fair point.
But this is more about being proactive. With such a stance, Macy’s could plow in an excess of $1.2 billion over the next three years back into improving its store experience, online shopping experience and getting out of bad leases.
Investors won’t like a dividend cut immediately. A 9% dividend yield is bonkers, however, and now Macy’s should be thinking about the next 15 years... not the past 15 years.
Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi
Read the latest financial and business news from Yahoo Finance
Dunkin' enters the plant-based meat craze by joining forces with Beyond Meat
Beyond Meat founder: We are working on meatless bacon and steak
Why Chipotle hasn't joined forces with plant-based meat kings Impossible Foods and Beyond Meat
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
