Learning From The Avon Products Dividend Cut

Dec.17.12 | About: Avon Products, (AVP)

Avon Products (NYSE:AVP) has long been a darling of dividend-growth investors. Before 2012, the company had a history of 22 years' worth of annual dividend increases. For many years Avon offered decent earnings and dividend growth. Unfortunately, Avon has recently fallen upon harder times. Since 2005, sales and profits have been on the decline. More recently, Avon was forced to cut its November dividend distribution by 73% from $0.23 to $0.06 per quarter. Before 2005, investors may have been lured into a position with Avon because on the surface things looked to be pretty good. However, if one were to look closer at Avon Products over the years, there were certainly warning signs that should have signaled an investor to look elsewhere. If followed, these warning signs could have allowed Avon investors to avoid the recent losses (Avon stock has fallen almost 18% this year) and dividend cut.

The beginning of the decline for Avon could be pinpointed in hindsight to the naming of Andrea Jung as new CEO back in 1999. While cracks would not begin to show until a few years later, Jung can be blamed for the fall of Avon due to the failed direction she tried to steer the company in while at the helm. Avon has always been a direct sales company. The focus has been on door-to-door sales while staying away from the retail competition of other cosmetic and beauty care giants such as Procter & Gamble (NYSE:PG) and L'Oreal. Unfortunately for shareholders, Jung tried to remake the direct sales cosmetic company into something it was not. During Jung's tenure Avon made several failed attempts to enter the retail market by selling in stores such as Sears and J.C. Penney. By moving into the retail market, Avon was beginning to take on the big industry competitors while moving away from what it was really good at, direct sales.

Jung did oversee Avon's expansion into many overseas markets. Unfortunately this was also met with bad mistakes. While not quite ready for the move globally, products were arriving behind schedule, orders were going unfilled and customers began looking elsewhere for better, more timely service. Alongside the operations problems, a bigger problem arose in China. While things looked successful in China initially, it eventually came to surface that Avon employees were involved in improper actions and bribery with Chinese officials. This soon led to an investigation by the SEC for violations of the Foreign Corrupt Practices Act. Avon has been hit hard with legal fees of over $225 million, taking a financial toll on the company.

With all the problems going on with Avon, the cracks didn't start to appear in the financials of the company until 2005. Investors merely looking at financials would think all was great with the company up until about 2005. The 2005 net profits and earnings per share were relatively flat when compared with 2004. This was the first sign of trouble as previous growth had been robust. In 2006, earnings took a large hit. Net profits dropped from $847 million down to $477.6 million for a decrease of 44%. EPS took a similar large drop from $1.81 to $1.06. At this point, this dividend growth mainstay has started to falter.

05 06 07 08 09 10 11
EPS 1.81 1.06 1.21 2.04 1.45 1.36 1.20
Divds. .66 .70 .74 .80 .84 .88 .92
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Profits started to recover until the recession of 2008 gave the company too much to handle. Since 2008, net profits and EPS have shown a decline every year. Investors owning Avon before 2005 should have been warned of problems with the large earnings decline of 2006. At that point it possibly would have been prudent to sell out of the position. However, dividend growth investors were still receiving a nice growing dividend. But keeping an eye on net profits between 2006 through 2011 and into 2012 should have been enough warning that a prudent investor should have jumped ship regardless of the fact that Avon continued to pay an increasing dividend amount to shareholders each year.

Investors who were just considering entering into a position with Avon more recently should have taken a look at the inconsistent, fluctuating and eventually downtrending EPS of the company, beginning with 2005, and realized that their money would be better invested in other dividend growth stocks. Investors may have been intrigued by the dividend growth history but should have been scared off by the financials of the company in more recent years.

The biggest lesson to be learned from Avon for dividend growth investors is that you must not only look at dividends and dividend growth history. You must also pay attention to the financials of the company and even the news surrounding the company. It is important to do a complete stock analysis of every company you consider purchasing. The mistakes of management started showing up in news about Avon before any bad signs appeared in Avon's financials. A few years later, the financials began to reflect management's bad decisions through lower net profits and EPS. Thus if you were looking at news surrounding the company, you may have avoided investing in Avon even 10 years ago. Looking at the financials alone may have helped you avoid investing in the company over the past seven years. However, Avon management has been paying out an increasing dividend every single year up until just this past month.

Investors looking only at the dividend payment would probably have just gotten out of a position in Avon. Oftentimes the cut in the dividend payment is a lagging indicator of things going wrong with the company. You must pay attention to a company's news, financials and dividend history to get a complete picture.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.