Faced with falling profits and high debt burdens, 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 cut its dividend payment to its lowest level in 16 years in a bid to save money and get its business back on track. Hanesbrands Inc., a century-old apparel maker, earlier this month scrapped its quarterly dividend that it started paying almost a decade ago. VF Corp., which owns Vans, The North Face and other brands, has also cut its dividend in recent weeks as it works to reduce its debt burden.
“The board and I did not take this decision lightly,” Intel chief executive officer Pat Gelsinger said Wednesday.
Other companies could follow given falling profits and resulting higher debt. Executives have been forced to carefully manage both expenses and debt to maintain free cash flow as fresh capital is more expensive under the Federal Reserve’s new interest rate regime.
Retailers in particular are facing falling profits as persistent inflation is also eroding consumer willingness to buy.
According to data compiled by Bloomberg, 17 companies in the Dow Jones US Total Stock Market Index have cut their dividends so far this year. Still, it’s not a decision executives make lightly, as it can scare off investors and hurt company stock prices.
Intel pointed to a recent statement and the release of the results, and declined to comment further. VF and Hanesbrands declined to comment.
lose an advantage
Intel, once the industry leader in chips, is grappling with a slump in PC sales, which make up the bulk of its revenue. Rating agencies 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 are likely to put pressure on the company’s profitability and credit metrics, analysts at Moody’s said. In addition to cutting dividends, Intel is cutting jobs, cutting executive pay, and slowing spending on new plants to save up to $10 billion by the end of 2025.
Still, Intel has more than $28 billion in cash on hand, Chief Financial Officer David Zinsner said this week. Total debt stands at around $50 billion after the company sold $11 billion worth of bonds earlier this month.
Easier to borrow
At Hanesbrands, fourth-quarter sales fell 16% to $1.47 billion due to lower consumer spending and lower orders from retailers, the company said. That, combined with higher funding costs and an upcoming maturity of over $1 billion in 2024, left the company with limited options given negative free cash flow of $471 million for 2022, compared to $554 million last year .
The dividend cut and other austerity measures will generate about $500 million in total operating cash flow in 2023, according to the company.
Hanesbrands this month refinanced debt that would have matured next year with offerings of high yield and leveraged loans. Both deals saw prices tighten in favor of Hanesbrands, indicating strong demand from investors.
The cancellation of 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 notes and loans tied to the company. “This was the right message to the market as a potential borrower who needs a decent amount of capital,” he said.
According to Amanda O’Neill, a credit analyst at S&P, the refinancing deal eased covenants related to leverage while capping dividend payments and restricting buybacks. “From a capital allocation standpoint, they’re pretty much forced under this change to ease their constraints,” O’Neill said. The rating agency recently downgraded the company by one notch to BB- with a negative outlook.
Hanesbrands said last month CFO Michael Dastugue would step down for family reasons. Scott Lewis, its chief accounting officer and controller, will serve as interim CFO while Hanesbrands searches for a permanent replacement.
surprise effort
At VF, the dividend cut is part of an effort to maintain its investment-grade rating, according to S&P. The company’s profits have suffered from lower van sales and Covid-19 lockdowns in China.
VF is targeting a leverage ratio of 2.5 times gross debt to adjusted earnings before interest, taxes, depreciation and amortization, the company said during its recent conference call. That equates to about 4.5 times this month, according to the company.
Its debt stemmed in part 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 incur another $1 billion in debt to fund a tax settlement related to its 2011 acquisition of Timberland. That has ballooned its debt, which is above the range it needs to maintain at its current rating level and its own publicly stated target of 2.5, according to S&P.