GES’s fat dividend doesn’t make it a great buy

Most long-term investors put a heavy emphasis on fundamental analysis to help guide their decisions about what stocks they should pay attention to. In that vein, one of the big questions that most investors like to try to answer is what kind of returns they can realistically expect over time. That might sound funny since stock prices are so fluid and vary from one extreme to another over time; but one of the things that has proven to be a pretty good point of reference is how actively management works to return value to its shareholders. There are two primary methods that get used: stock buybacks and dividends.

Over the last couple of years, stock buybacks have played an increasingly larger role in what analysts seem to consider as part of a stock’s fundamental strength. Stock buybacks are interesting because companies use a portion of their available cash to reduce the number of available shares in the marketplace. Over time, that reduction generally means that the stock price should go up, which means that compared to other things management could choose to do with its cash, buying its own stock is deemed to provide a stronger rate of return.

Dividends are something that I think are a stronger indication of fundamental strength – in particular when you talk about how consistent the dividend has been over time. Income-oriented investors like to gravitate to stocks offering very high dividends as an alternative to bonds and other interest-bearing instruments. Sometimes, however a high dividend really isn’t a good indicator that a company has great fundamental strength; the sustainability of that dividend is a better question to ask.

Guess? Inc. (GES) is a stock that, if you work first off of it’s annual dividend yield, looks pretty tempting. With a 4% annual dividend yield right now, the stock is offering a better passive income stream that even a 30-year Treasury bond. Based on some of the fundamental elements that I like to use, the company also some interesting strengths working in its favor; but I do think that the dividend’s sustainability is something that has to be questioned. As I think you’ll also see as we run the numbers below, I also don’t believe the stock offers a good enough value proposition to make jumping on the stock based on its fat dividend alone.

Fundamental and Value Profile

Guess?, Inc. designs, markets, distributes and licenses a lifestyle collections of apparel and accessories for men, women and children. The Company operates through five segments: Americas Retail, Europe, Asia, Americas Wholesale and Licensing. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Licensing segment includes the around the world licensing operations of the Company. Its apparel is marketed under various names, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, MARCIANO, Question Mark and Triangle Design, GUESS Kids, Baby GUESS, YES, G by GUESS and GUESS by MARCIANO. GES’s current market cap is $1.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by a little over 8%, while revenues rose 9.25%. The pattern reversed drastically in the last quarter, as earnings dropped nearly -64%, while sales declined about -6.25%. The company operates with a negative margin profile that also appears to be deteriorating, with Net Income -.3% of Revenues for the last twelve months, but dropping in the last quarter to -2.2%.

Free Cash Flow: GES’s free cash flow is marginal, at a little more than $41 million. That translates to an unimpressive Free Cash Flow Yield of just a little more than 2%.

Debt to Equity: GES’s debt/equity ratio is .04, which is very low. The company doesn’t have a lot of debt, which means that they don’t have to worry about servicing a lot of debt; however, their negative Net Income means that their available cash, which was a little more than $138 million in the last quarter, has been declining. It also implies that their fat dividend really isn’t sustainable in the long-term unless they can reverse their Net Income.

Dividend: GES pays an annual dividend of $.90 per share, which translates to a dividend yield of a little more than 4% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. GES’s Book Value is $10.25, which means that the stock’s Price/Book ratio right now is 2.18. Their historical Price/Book ratio is only 1.56, which suggests the stock is overvalued by almost 29% right now. It also suggests that the stock won’t really offer much in the way of an attractive value proposition unless it drops to a little below $13 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: GES is down almost 14% compared to its May high at around $26 per share, but has shown some strength since late December, rallying off of support at around $19 to its current price. Immediate resistance is around $23. A break above that level would confirm the stock’s bullish strength over the past month and could be taken as a signal of a short-term upward trend. If the stock reverses, a drop below $19 would wipe out all of that bullish momentum and likely signal the continuation of the stock’s mostly downward trend over the past eight months.

Near-term Keys: If the stock can break above resistance at $23, there could be an interesting short-term bullish trade to be had using call options or the stock by itself, with a near-term target at its 52-week high around $26. The strongest bearish signal would come from a drop below $19, with a bearish trade target between $15 and $16 per share. There is really no basis, however for a long-term, value-oriented position at the stock’s current price.

 
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