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Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (30466)	1/21/2019 10:25:38 AM
From: E_K_S	1 Recommendation Recommended By Thehammer Read Replies (1) \| Respond to of 34328

Should a company pay a dividend or pay down debt? Several companies that I look at get into problems taking on too much debt (typically from an acquisition) that still pay a dividend. CTL is one I own. They company generate tons of EBITDA and FCF but also has a very large debt position paying interest at pretty high rates too. There has been the argument that management should (1) eliminate the dividend and put that money into paying down debt, or (2) pay a smaller dividend and use proceeds to pay down debt, or (3) eliminate the dividend, buy back shares and pay down debt or (4) do nothing and continue to allocate part of the FCF to pay down debt. These are all viable options but as an investor, I like to see some debt paid down even at the expense of receiving a lower or no dividend. There are different situations in every investment. CMTL stopped their dividend for about a year, traded at a multi year low (as a result of an acquisition that took longer to restructure). I picked up shares at/near $12.00/share and watched as management worked on the restructure. In about 12 months they reinstated a lessor dividend (about 50% of what they paid previously) but the stock then eventually traded up to $28.00/share. The proposition to Pay a Dividend or Not to pay a dividend can be a tricky one especially for a small to medium size company that has just done a large debt based acquisition. This can be an opportunity if one understands the potential future revenue streams from the assets acquired and if management has a plan to build those new revenue streams. These dividend payers are typically the marginal profitable companies, have problems w/ coverage on both dividend paid and/or have accumulated large debt positions. It's the current and future workout plan that provides the opportunity. I may take on a small speculative position hoping to see (1) the dividend maintained while management stabilizes/grows future FCF or (2) eliminates the dividend, fixes the cash flows and then reinstates that divided. BGS, CTL & NWL are three companies that come to mind that currently pay a high dividend (including ROC) but have a large debt and/or legacy product portfolio issues that need to be fixed. BGS about 18 months into their work out, have paid down lots of debt, maintained their dividend and have even bought back shares when the stock traded at/near their 52 wk low. NWL about 12 months into their restructure, continues to pay their dividend while investing in new logistic systems/technologies, eliminating/selling some product lines and paying down debt with the goal of expanding margins and increasing FCF. CTL is a company w/ a large debt load from the acquisition of Level 3 and continues to pay a high dividend. The company has a lot of legacy services that are being upgraded and/or eliminated, growing EBITDA using new technologies acquired from their acquisition (Level 3 fibre backbone), introducing cloud services that generate more predictable revenues and paying down debt every quarter. The knowledgeable investor will understand the problems that need to be solved (typically need to grow EBITDA), see if management has a plan of action and look for specific actions/results that achieve the goal of increasing FCF and debt reduction. There are many companies that I just do not invest in as I just can not understand what's in their balance sheet and what makes up predictable income streams (like many of the bank stocks). Other companies may have legacy and/or outdated product portfolios (and/or logistic delivery/inventory systems) that can be fixed. The key is if there is a management team that understands the problem(s) and can fix them. (Note: I like to see new experienced management brought in as that is a sign that the BOD acknowledges there are problems that need to be fixed). Typically in these cases, the right approach is the elimination of the dividend, fix the legacy problems and/or reduce debt then put back in a small dividend that can be grown over time. Every situation is different but achieves the same results, growing EBITDA & FCF. Once that is done, a dividend may/could be announced. Good Investing EKS