Ouch! Covanta Cuts Dividend

The coronavirus pandemic claims one of its first dividend victims.  Waste handler Covanta Holding (CVA:  NYSE) is making several changes its cash management and capital structure in light of adversity in its operating environment.  Policies such as work stoppages and social distancing aimed at the health threat of the virus have led to shifts in waste generation patterns and added costs for worker protection.  Looking ahead to the unknown Covanta management appears to have acted quickly for the sake of conserving capital that might be needed under worst case scenarios.

First, Covanta is cutting its dividend from $1.00 to $0.32 per share.  The move is expected to save $90 million annually.  That will be a big boost to company’s cash kitty.  Investors may not be so enthusiastic about seeing the money there and not in their own bank account.  At the new payout level and the current stock price, the dividend yield is 4.3%.  This yield is still appealing for many investors interested in current income given comparatively low interest rates.  Thus while current shareholders may feel the loss, new investors could still see CVA as an attractive stock.

A fortified balance sheet may make Covanta more appealing at its new depressed price level.  At the end of March 2020, the company had $2.6 billion in long term debt on its balance sheet.  With $376 million in equity, Covanta is one of the most highly leveraged operations in the waste management sector.  Its multiple of cash earnings to interest burden is less than three times, a score that could deteriorate if profit margins slip.  

Covanta may need to save more than a portion of its dividend payout to bring its indebtedness down to more reasonable levels.  Management apparently agrees with this view.  A cost reduction program has been initiated to save between $15 million to $30 million in 2020.  Immediate savings is expected to accrue from a hiring freeze, a ban on non-essential travel, cuts to senior management compensation, and wage reductions and furloughs for other corporate support personnel.  Even the board of directors is going to feel the pinch with a 60% reduction in their fees over the three months the cost reduction program is in place.

Cost savings may get soaked up by new expenses triggered by the coronavirus threat.  The company is implementing new protective protocols to ensure that employees remain safe on the job.  Protective garb and face masks as well as staffing changes will add to operating cost.  Three of Covanta’s waste-to-energy facilities accept regulated medical waste and will receive materials infected with the coronovirus.  Specialized equipment is required at these facilities to protect employees and ensure that contaminated materials cannot pose a threat to the public before it is placed in their incinerators.

Management has apparently decided that cash conservation and debt reduction are not the only priorities.  In a recent conference call to explain the recent dividend and cost savings plans, management described plans to continue investment two waste handling facilities in the United Kingdom and one plant in Scotland. 

Rookery South Energy Recovery Site

Despite the coronavirus outbreak construction can commence at the two sites in the United Kingdom, for which Covanta and its partners closed financing arrangements in February 2020 just before COVID-19 spread to the U.S. and Europe.  Covanta owns 40% of the Rookery South Energy Recovery facility in Bedfordshire, England along with Green Investment Group (40%) and Veolia (20%). When completed the Rookery facility will generate 60 megawatts of electricity from non-recyclable waste.  The British utility Biffa is the partner for Covanta and Green Investment Group for the Newhurst facility.  It too is a waste-to-energy plant with a planned capacity of 42 megawatts.  Covanta will operate both facilities when completed in about three years.     

Covanta’s dividend payment cut will be felt in many households. Shareholders may take consolation from the fact that Covanta’s growth plans are well underway.  The near-term pessimism reflected in the stock price will not be an obstacle to those plans given that financial arrangements are already in place.  With some shifts in cash management the company appears poised to keep its strategy in place even during a period of adversity.  

 

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