Tuesday, August 19, 2008

Dividend Demise

Earlier this month organic grocer, Whole Foods, Inc. (WFMI: Nasdaq) announced it would be suspending its quarterly dividend “for the foreseeable future.” Prior to the announcement the stock had yielded 4.1%. Investors have been encouraged in earlier posts to consider strong dividend stocks. Of course, the caveat was to choose companies that are able to sustain the dividend through thick and thin times.

As a high end grocer, one might have made the argument that Whole Foods with its newly acquired Wild Oats operation is somewhat recession resistant. Unfortunately, the folks who wrote the books on recession and consumer spending had not factored in fuel prices at the level we see today. Consumers are choosing between gas and groceries - a decision that apparently leaves pricier items off the grocery list.

If investors had looked at Whole Food’s second quarter balance sheet and cash flow statement, they might have concluded that the WFMI dividend - $28 million per quarter total - was relatively safe. The Company had $58.4 million in cash on the books at mid April 2008, after churning out $86.3 million in cash in the second quarter - $156.5 million for the first six months of the fiscal year.

Yet here we are with no dividend. Whole Food’s management cited economic woes and the need to remain fiscally conservative. In the fiscal third quarter ending July 6th, sales declined sequentially for the second quarter in a row and the operating margin declined to 3.5% compared to 5.3% in the year-ago quarter. Yet the Company still generated $110.7 million in cash in the quarter.

What really may have spooked management is the reopening of the Federal Trade Commission’s review of Whole Food’s acquisition of Wild Oats. This is a bit of a wrinkle that could cost the Company big time if further legal maneuvering is unsuccessful in muzzling the FTC.

If there is a lesson here, it is that balance sheet and cash flows many not be enough to protect a dividend.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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