Faced with declining profits and heavy debt, companies are reducing dividend payments to shareholders to improve the health of their balance sheets.
Intelthe world’s largest computer maker, this week cut its dividend payment to its lowest level in 16 years in an effort to preserve cash and help turn around its business. Hanesbrands Inc., a century-old apparel maker, earlier this month eliminated the quarterly dividend it began paying nearly a decade ago. VF Corp., which owns Vans, The North Face and other brands, has also cut its dividend in recent weeks as it works to reduce its debt burden.
“The board and I do not accept this decision,” Intel Chief Executive Officer Pat Gelsinger said Wednesday.
Many companies may follow suit in the face of slower profits and subsequently higher leverage. Executives have been forced to carefully manage expenses and debt to maintain free cash flow as fresh capital is more expensive under the new Federal Reserve regime.
Retailers in particular face reduced profits, as persistent inflation also erodes consumers’ willingness to spend.
So far this year, as many as 17 companies in Dow The Jones US Total Stock Market Index has cut its dividends, according to data compiled by Bloomberg. However, this is not a decision that executives will make easily, as it can scare investors and companies’ share prices.
Intel pointed to a recent statement and its earnings release and declined to comment further. VF and Hanesbrands declined to comment.
Losing an Edge
Intel, once the leader in the chips industry, is struggling with declining personal computer sales that generate most of its revenues. Ratings firms Moody’s Investors Service, S&P Global Ratings and Fitch Ratings all downgraded Intel’s debt.
A slowdown in IT spending and continued loss of market share will likely put pressure on the company’s earnings and credit metrics, Moody’s analysts said. In addition to cutting the dividend, Intel is eliminating jobs, cutting executive pay and slowing spending on new plants to save up to $10 billion by the end of 2025.
However, Intel holds more than $28 billion in cash, Chief Financial Officer David Zinsner said this week. Total debt stands at nearly $50 billion after the company sold $11 billion in bonds earlier this month.
Easier to Borrow
At Hanesbrands, sales fell 16% to $1.47 billion in the fourth quarter due to slower consumer spending and lower orders from retailers, the company said. That, combined with higher financing costs and a future maturity of more than $1 billion in 2024, leaves the company with limited options amid negative free cash flow of $471 million for 2022, compared to $554 million last year.
The dividend cut and other savings measures will generate approximately $500 million in total operating cash flow by 2023, according to the company.
Hanesbrands this month refinanced debt that was due next year with high-yield bond and leveraged loan offerings. For both deals, pricing tightened in favor of Hanesbrands, indicating strong demand from investors.
The dividend cut earlier this month likely resulted in lower borrowing costs for Hanesbrands, said John McClain, portfolio manager at Brandywine Global Investment Management, which owns bonds and related loans. of the company. “This is the right message to send to the market as a prospective borrower who needs a reasonable amount of capital,” he said.
The refinancing deal weakens covenants related to leverage while capping dividend payouts and restricting buybacks, according to Amanda O’Neill, a credit analyst at S&P. “They are somewhat constrained from a capital allocation standpoint under this change to loosen their covenants,” O’Neill said. The ratings firm recently downgraded the company a notch to BB- with a negative outlook.
Hanesbrands last month said Chief Financial Officer Michael Dastugue would resign for family reasons. Scott Lewis, its chief accounting officer and controller, will serve as interim CFO while Hanesbrands searches for a permanent replacement.
At VF, the dividend cut is part of an effort to maintain its investment grade rating, according to S&P. The company’s revenue suffered due to lower sales for Vans and Covid-19 lockdowns in China.
VF is targeting a leverage ratio of 2.5 times gross debt to adjusted earnings before interest, taxes, depreciation and amortization, the company said in its most recent earnings call. That compares to about 4.5 times this month, according to the company.
Its debt comes in part from “aggressive” acquisitions of brands big and small, including a $2.1 billion deal for streetwear brand Supreme in 2020, said Mike Campellone, an analyst. by Bloomberg Intelligence.
Then, the company was forced to take on another $1 billion in debt to finance a tax settlement related to its acquisition of Timberland in 2011. That inflated its leverage, far beyond what it needed to sustain. its current rating level and itself in the public. stated target of 2.5, according to S&P.
Learn how to navigate and build trust in your business with The Trust Factor, a weekly newsletter that explores what leaders need to succeed. Sign up here.