There’s a New Avon Lady (CEO): What’s Her Plan on That 5.7% Dividend Yield?

If you don’t believe that stock prices will rise very much in the next few years, it’s natural to want to buy shares that are paying out healthy dividends. Healthy means amply covered by the company’s cash flow.

So should we buy into the juicy 5.7 percent dividend yield that Avon Products (AVP) currently offers?

AVP Dividend Yield Chart

AVP Dividend Yield data by YCharts

Avon has a marvelous brand and sells lotions and crèmes that promote healthy skin at a price that most of us can afford. I come from Maine, so naturally whenever I’m back home, I splash on Avon’s Skin-So-Soft bath oil. It is as good or better an insect repellant than real insect repellant. If the unofficial state bird of Maine is the mosquito, then Skin-So-Soft should be the state cologne.

Avon is a direct-sales outfit, so it depends on 6 million independent reps to sell its products to their neighbors and friends. Go ahead and chuckle if you think that sounds endearingly old-fashioned, but Avon makes it work. Its 6 million reps helped it bring in $11 billion in sales last year.

AVP Revenue TTM Chart

AVP Revenue TTM data by YCharts

Unfortunately, the difference between Avon’s revenues and its expenses -- in some circles known as a profit margin -- has been shrinking lately.

AVP Revenue TTM Chart

AVP Revenue TTM data by YCharts

And Avon’s per-share earnings have really come down as a result.

AVP Net Income TTM Chart

AVP Net Income TTM data by YCharts

Earlier this month Avon said it would replace its chief executive, Andrea Jung, with a new boss named Sheri McCoy. McCoy will take over at the end of this year.

McCoy’s long-term task, obviously, is to discover a way to boost Avon’s profitability and growth. But shorter-term, she’ll face the question of what to do about Avon’s dividends, which are no longer covered by the company’s earnings.

AVP EPS Diluted Quarterly Chart

AVP EPS Diluted Quarterly data by YCharts

The company’s earnings yield is now significantly lower than its dividend yield.

AVP Earnings Yield Chart

AVP Earnings Yield data by YCharts

McCoy may decide to go ahead and maintain the dividend at current levels. Paying out a dividend that significantly exceeds earnings is not always a bad thing. Think of a company that, say, sells off a division at a loss, incurring a large non-cash charge against its earnings, so the EPS dips temporarily way below the per-share dividend. On paper, the dividend isn’t covered. But in fact, there’s plenty of cash flow available. Or think of a real estate investment trust, whose profitability is routinely understated thanks to oversized depreciation charges. Most REITs pay dividends that exceed their GAAP earnings per share.

Avon’s problem isn’t one-time charges or depreciation. It genuinely hasn’t recently earned enough profit to cover its dividend. But under McCoy, that may change. The consensus among analysts is that she will find a way to lift Avon’s earnings per share to almost $1 next year. That would make paying the company’s 92-cents-a-share dividend easy.

AVP Cash and Equivalents Chart

AVP Cash and Equivalents data by YCharts

Even if it takes longer for McCoy to get Avon’s EPS back to $1 a share than analysts think, it appears Avon has the cash to keep paying out those dividends for a while.

AVP Cash and Equivalents Chart

AVP Cash and Equivalents data by YCharts

Still, be cautious about this stock. At 16 times the $1 a share analysts are projecting Avon will earn next year, Avon’s stock has a PE ratio that’s higher than that of the average S&P 500 share.

Stephane Fitch is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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