It should have been no surprise to investors on Wednesday afternoon when Mattel (MAT) released news it would be cutting its dividend by 60%. The writing had been on the wall for some time and is why we warned investors clinging to the company’s high yield to be cautious. (See article HERE) Yet, the move following the news, which pushed the stock down more than 8%, insinuates that many investors hung on to hope that the juicy dividend would remain in the face of surmounting odds against it.
The good news for Mattel shareholders is the dividend was not fully eliminated. This means the company can still hang its hat on a dividend payment streak of over 25 years. The bad news is the move stops only some of the bleeding happening at the company. One has to ask if management should have simply swallowed the frog and fully cut the payouts so they could objectively focus on finding ways to grow the underlying business.
The fact remains that all dividends are a function of earnings and cash flow. Therefore, consistently stagnate or falling earnings present a real dilemma to those holding a stock for income purposes. The point of dividend investing is to create a stream of sustainable income, not to be paid an inconsequential “holding fee” while you watch your underlying position drift ever lower. While Mattel’s management should be commended for finally facing the reality that their dividend commitment was ridiculous, this “right-sizing” hardly addresses the headwinds the company is facing in terms of an irrelevant portfolio and an unclear plan for a competitive edge going forward.
How should investors look at the stock here?
If you have held the name for some time you may be back to break-even at best, though more likely underwater. If that’s the case it’s time to revisit your plan for the position and respond accordingly. There’s little to indicate that dividend growth will return in the near future and capital gains are highly dependent on the innovation that management has yet to prove it can deliver. It’s now hard to find a value proposition here when you can hold diversified dividend ETF such as Vanguard’s High Dividend Yield (VYM) or a steady grower like Coca-Cola (KO) at a similar yield. However, investors should do their homework regardless of what they buy to ensure they don’t fall into a similar trap.
If you shorted the name on our article last month it’s time to take profits off the table or at least take a portion and move your stop down. The news is out and the move has happened. While the storm clouds are far from clear and future dividend cuts could loom, the trade has unfolded and the risk vs reward has moved to neutral here. If you continue to hold a piece short, trail a stop and stay disciplined while staying aware that at some price the company’s stock will be attractive for buyout potential due to its trademark portfolio.
If you’re not in the name here, there’s no reason to start. The short trade has transpired and the value proposition on the long side is far from clear. While there are not extensive opportunities in today’s market environment those that do exist have a much better risk vs reward proposition than Mattel does, even at these levels. Stay tuned as we examine some of these names in the future.
By Daniel Czulno
Author has positions in stocks mentioned as of writing. Select clients of Tatro Capital own Coca-Cola.