Do Vulcan's Managers Know What They're Doing?

Is Vulcan (VMC) run by managers that understand business or kids playing in a big sandbox? For shareholders' sake, I hope management isn't just a feel good bunch, but logical thinkers that will do what is right for the company. You can't fix a company by avoiding tough decisions.

Thursday, VMC filed a SEC document detailing $400M of new long term debt. The bonds yield 10.375% and 10.125%. That's about 8% more than Treasuries. The rates are punitive. The proceeds will be used to repay short term debt and maturing long term debt. Since they're paying 10+%, rather than using internally generated funds, for the funds necessary to repay debt, I assume that cashflow hasn't been robust.

If cashflow hasn't been robust, borrowing costs have risen, and projected net income is approximately 100% of VMC's dividend, why pay a dividend? Or why pay as large a dividend as it has been paying. With 110M shares outstanding and a $2 payout, cessation of the dividend would free up $220M to boost liquidity.

That's what a good businessman would do. Conserve the cash until better times. Don't gamble with having to go back to the banks again and pay a higher interest rate. Yes, shareholders will be disappointed, but the price will drop further if the company gets into really hot water down the road.

Every day it becomes clearer that the Obama stimulus is not going to be a road and bridge building bonanza. The numbers are puny compared to original hopes. That means that road building will not rescue residential and commercial shortfalls. Improvements in diesel and liquid asphalt pricing won't either. The quarterly numbers to be announced in early February will fall short of easily earning their dividend. Their guidance is likely to be hedged and paint 2009 as another difficult year.

At the high multiple that VMC is presently valued, at there isn't any room for dividend cuts, lowered guidance, or the media tallying up the pittance in the stimulus devoted to roads and bridges. My short position can only improve.

Disclosure: Short VMC.

Comments

[Paul Price:]

VMC has joined GE and many of the banks in borrowing at high rates in order to continue paying dividends.

This is gross mis-management.

Jan 31 06:57 PM

[bill 6240:]

Greed. Since the insiders own a large amount of company stock and the price is low the only way they can gain a benefit is to keep the dividend high. Everytime the stock is high the officers and board unload shares. It is called the nature of the beast. Money

Feb 01 08:41 AM

[auto44:]

I guess you're right bill 6240, another case of the outside stock holders being used as patsies.

Feb 01 09:03 AM

[Alan Brochs...:]

You are spot on...

Feb 01 09:28 AM

[JediMaster:]

I agree with your case although if you notice what is going on with the stimulus package right now, the GOP is not going to allow the stimulus bill to pass unless the amount of $$$ designated for infrastructure is raised. It should not suprise anyone that the Democratic party intend to cram every left-wing policy into the bill despite its economic impact. Just wait and see...many of the lobbyists for the construction and industrial companies are GOP constituents who will not allow the bill to pass unless companies like VMC get their fair share. After all it is their companies that provide the most short term jobs. We are only a few months away from the housing bottom so I wouldn't recommend shorting VMC...

Feb 01 04:00 PM

[Turnipseed:]

Thanks for the info Mr Kabourek. Quarterly earnings report comes out after close of business on Feb 9, conference call in AM on Feb 10. Could be interesting.

Feb 01 06:21 PM