be Paying a Dividend
Eight months ago, I wrotethat Coach , shouldn't be paying a dividend. Coach has maintained its high dividend pay out to appease investors, even as it's lost market share in North America toMichael Kors since that time. Many "in flux" retailers, such asRadioShack , have tried this strategy with disastrous results. To best serve investors, Coach should consider cutting its dividend soon. In Korsmost recent quarter sales surged 56% and comparable sales rose 26.2%. Meanwhile, Coach's first quarter earnings dropped ($0.68 vs. $0.84) and revenue slid (7.4%) on a year over year basis. The reason was market share losses in North America; Coach's North American comparable sales have dropped over 20%, each of the last two quarters.Coach's stock fell nearly 10% in the wake of its most recent quarter; the stock is now down 38% over the past year while louboutin replica Kors has risen 49%. Given the rough quarter, and the past year, I was surprised to see Coach maintain its current dividend last week.Coach's plan sends mixed messagesCoach meets absolutely none of the characteristics of a typical high yielding dividend stock. High yielding stocks are often in stable, no growth industries. Does that sound like apparel to you? High yielding stocks also typically have very few places left to invest their capital with high rates of return. But Coach's turnaround strategy is to renovate stores, beef up its product line, and to avoid discounting. Those strategies all offer a higher potential return than the 3.89% dividend yield, and they're all very expensive.Coach is closing seventyunder performingstores, renovating flagship stores, and maintaining its dividend. This store closings feel like a mixed message, and replica louboutin it makes me wonder if Coach's dividend is impacting its budget for capital expenditures. One way to find out if Coach has the money to reinvest in itself is by measuring its operational cash flow, compared to its capital expenditures (or the CF to CAPEX ratio). The higher this number is, the better. As the chart below shows, Coach is still in line with its peer but it's trending in the wrong direction, compared to Kors. If the above trend continues at its current pace, that could be problematic.Finally, let's remember that Coach's international sales, which grew 14% during the first quarter, are keeping the company relevant right now. growth. With new markets, and new opportunities, Coach may need to spend more than ever.A scary precedentThere is precedent for retailers, in changing industries, holding on to a high yield. It's not good. Before I get into an example, it's important to remember where dividends come from free cash flow. Over the past year Coach has paid out more cash in dividends than ever. At the same time, its free cash flow has dropped dramatically. Coach is paying out more, partly due to share repurchases, and bringing in less. Why?COH Free Cash Flow (TTM) data by YChartsAs everyone on the planet knows, the past few years have not been good to RadioShack. When things got worse, it compounded the error by hiking the dividend.RSH Dividends Paid (TTM) data by YChartsYou may laugh at RadioShack's misfortune, but I remember plenty of "value" minded investors who supported the dividend. This strategy, to raise your dividendbecausethings are going poorly may sound crazy but it's very common in stocks. I'm sure you can think of a few land line phone stocks, big box electronic stocks, our out of style apparel stocks that nearly lured you in on a dividend hike. They'll offer you a dividend to keep you around through the "slow growth phase," but remember, that's money taken away from the business. Like RadioShack these dividends tend to go higher, just before they're cut altogether.The danger of the stock marketSo why do companies keep a high dividend when things are at their worst? The short answer is that the stock market is a dangerous place. Due to the short term christian louboutin shoes replica focus of most investors, companies have to manage your expectations instead of managing their business. There's no way for us to tell if replica louboutin shoes the excess reinvestment, in lieu of a dividend, would help stabilize North America for Coach. But, at a distance, I do think it's a better strategy.Perhaps Coach's management team has done their homework and calculated that there is not a better place to invest the money. However, from the outside looking in, given the trends noted above, the dividend feels slightly risky right now.