Faced with declining earnings and heavy debt loads, companies are reducing dividend payments to shareholders to improve the health of their balance sheets.
Intel, the world’s largest maker of computer processors, this week slashed its dividend payment to the 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 started paying nearly a decade ago. VF Corp., which owns Vans, The North Face and other brands, also cut its dividend in recent weeks as it works to reduce its debt burden.
“The board and I didn’t take this decision lightly,” Intel Chief Executive Officer Pat Gelsinger said Wednesday.
More companies may follow in the face of slowing earnings and subsequently higher leverage. Executives have been forced to carefully manage both costs and debt to maintain free cash flow as fresh capital is more expensive under the Federal Reserve’s new rates regime.
Retailers in particular face declining profits, as persistent inflation also erodes consumers’ willingness to spend.
So far this year, as many as 17 companies in the Dow Jones US Total Stock Market Index cut their dividends, according to data compiled by Bloomberg. Still, it isn’t a decision that executives make easily, as it can scare off investors and dent 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 industry leader in chips, is struggling with a slump in personal computer sales that generate the bulk of its revenues. Ratings firms Moody’s Investors Service, S&P Global Ratings and Fitch Ratings have all downgraded Intel’s debt.
Slowing IT spending and continued market share losses will likely put pressure on the company’s profitability and credit metrics, analysts at Moody’s said. In addition to the dividend cut, Intel is eliminating jobs, slashing management pay and slowing spending on new plants to save as much as $10 billion by the end of 2025.
Still, Intel holds cash of more than $28 billion, Chief Financial Officer David Zinsner said this week. Total debt stands at around $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 an upcoming maturity of over a $1 billion in 2024, left the company with limited options amid negative free cash flow of $471 million for 2022, compared with $554 million in the year earlier.
Cutting the dividend and other savings measures will generate approximately $500 million in total operating cash flow in 2023, according to the company.
Hanesbrands this month refinanced debt that would have come due next year with high-yield bond and leveraged loan offerings. For both deals, pricing tightened in Hanesbrands’ favor, indicating strong demand from investors.
Nixing the dividend 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 loans tied to the company. “This was the right message to send to the marketplace as a prospective borrower in need of a reasonable amount of capital,” he said.
The refinancing deal loosened covenants related to leverage while capping dividend payouts and restricting buybacks, according to Amanda O’Neill, a credit analyst at S&P. “They are pretty constrained from a capital allocation standpoint under this amendment to loosen their covenants,” O’Neill said. The ratings firm recently downgraded the company one 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 is searching for a permanent replacement.
Surprise Expense
At VF, the dividend cut is part of an effort to maintain its investment-grade rating, according to S&P. The company’s earnings have 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, tax, depreciation and amortization, the company said during its most recent earnings call. That compares to about 4.5 times this month, according to the company.
Its debt originated partly 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 at Bloomberg Intelligence.
Then, the company was forced to take on another $1 billion in debt to fund a tax settlement related to its acquisition of Timberland in 2011. That bloated its leverage, which is above the range it must maintain at its current rating level and its own publicly stated target of 2.5, according to S&P.
Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter examining what leaders need to succeed. Sign up here.
