Today’s news: Guess?, Inc. (GES) cuts its dividend.
Yesterday, Guess?, Inc. (GES) announced that the company will cut its quarterly dividend in half, from $0.225 to $0.1125 per share. The company intends to issue convertible five-year notes, and use the proceeds to repurchase common stock.
Click here for the dividend and convertible notes announcement.
It’s not entirely unusual for a new CEO at a company to change the dividend policy due to having a different idea of how the company should be using its cash flow. In the case of Guess, the CEO apparently decided that buying back stock is a better use of the cash.
From a fundamental analysis point of view, there hasn’t been anything wrong at Guess: earnings growth is strong, the P/E is low and the debt levels are very low. Earnings per share (EPS) were $0.98 in fiscal 2019. The consensus estimates for 2020 and 2021 are $1.20 and $1.42 (January year end), reflecting EPS growth of 22.4% and 18.3%. Those are excellent earnings growth rates. At a share price of 16.65, the 2020 P/E is 13.9. Additionally, the long-term debt-to-capitalization ratio has been incredibly low at 4%, as reported by both MarketWatch and a major discount brokerage firm.
The decision should affect the share price for a couple of days as traders buy and sell. What will likely happen in the coming weeks and months is Guess will begin repurchasing stock, and the buying activity will first shore up the share price and then theoretically drive the share price higher.
The company also reaffirmed first-quarter guidance, meaning that prior expectations for first-quarter results remain the same. The quarter ends on May 4.
Click here for the affirmation of first-quarter guidance.
Yesterday, while writing my Weekly Update that arrived in your inbox this morning, I moved GES from Strong Buy to Hold due to the share price dropping below its trading range. As soon as the share price stabilizes and begins to turn upward, I will move the stock from a Hold to a Buy recommendation. Hold.