The Avon Lady Offers a 6% Dividend Yield, But What’s Her Makeup Hiding?
Avon Products (AVP) is experiencing a world of hurt these days, one that includes plunging profits, whiny negotiating partners and an SEC investigation. So even with its 6% dividend yield, Avon is not your father’s value investment. But for a walk on the wild side, let’s look at why that triple 10-year Treasury rate payout might attract a few gamblers.
Avon’s problems started hitting its share price late in 2010 and grew in 2011 as sales in Brazil and other usually hot markets faltered. Avon, the door-to-door seller of beauty products, works mainly in foreign markets. Less than a quarter of its sales are in the U.S. The shares are down about 50% since September 2010, making for a homely stock chart.
Avon originally blamed missed earnings on some technical issues, but by the end of 2011, the company was reassessing its entire business plan and avoiding forecasts. The Securities and Exchange Commission started looking into bribery allegations against Avon employees in several countries, including China, which was supposed to be a fertile place for new business. Heads rolled. Investors called for the ousting of CEO Andrea Jung, too, and she consented.
Meanwhile, the suffering woke up the takeover hunters. With annual sales of more than $11 billion, Avon still swamps competitors Estee Lauder Companies (EL), Elizabeth Arden (RDEN) and Revlon (REV) in size. More to the point, Avon’s footing in those less developed foreign consumer markets fuels dreams of fast growth in the takeover types. That 20% share price spike in March is the result of a takeover bid from fragrance company Coty. It’s not the only suitor.
Coty eventually offered $24.75 per share for Avon and announced that it had secured financing from Berkshire Hathaway (BRK.B). But like a petulant younger sibling, Coty withdrew the offer to play because Jung wasn’t paying it enough attention. Few believe that’s the last Avon will hear from Coty or other potential buyers.
Yield hungry investors look at Avon’s long history of steadily rising dividends and wonder whether it can pull off at least maintaining this one. It’s a good question, because Avon’s earnings no longer cover its dividend payments, and it’s quickly depleting the cash pool that could pick up the difference. Its payout ratio (based on earnings) and its cash dividend payout ratio (based on cash on hand) both recently rose above 1.
Other investors are betting on the boost the share price could get with a takeover. Or the rise it might get if it can attract a respected CEO. And that when those things happen, the company will make maintaining that outsized dividend a priority right up there with investing in emerging markets, settling SEC claims, and shoring up sinking profit margins.
Really. Like we said, this is not your father’s value play.
Filed under: Company Analysis