Textron's Selling Point? Dividends 19 comments
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A High Flying Stock
Who doesn’t love a bargain?
It’s true: sometimes Wall Street overlooks a tremendous value – particularly when the analysts and investment bankers are more worried about keeping their jobs right now than they are about looking for diamonds in the rough.
Textron (NYSE: TXT) is one of those diamonds.
The company, which manufactures civil and defense aircraft as well as industrial products (like E-Z-GO golf carts), has seen its share price fall off a cliff since last May, when the stock closed as high as $64.23… as of this writing, Textron was trading at $6.81.
That price is pretty important – it means that Textron is selling for only 62% of the book value of its assets. It means that the company is on the market for only 3.5 times its earnings. It means that Textron is a bargain.
But why’s the company so cheap?
After all, the Textron has some market leading attributes that should be factored into that share price. Just look at its largest business segment, Cessna – probably the most recognizable brand in general aviation – which designs and builds aircraft ranging in size from their two-seat single engine SkyCatcher to the Citation business jets that whisk around the rich and famous.
The Textron’s helicopter subsidiary, Bell, builds aircraft like the V-22 Osprey used by the U.S. military. It also produces civilian helicopters used for everything from offshore exploration and rescue operations.
The company’s industrial segment includes the E-Z-GO line of golf carts and utility vehicles. It also produces blow-molded plastics and fiber-optic connections. Finally, there’s Textron finance, which provides financing for acquisitions and large equipment purchases.
Changing the Face of Aviation
Besides being a market leader, Textron is also changing the industry through technology. Currently, all new Cessna aircraft feature a “glass cockpit,” which means that flight instruments are displayed on digital screens instead of traditional dials. These instrument suites afford small aircraft a level of sophistication not available in some airliners. Trust me…
Textron is a company I know well – so well in fact that I've put my life in their hands for years. You see, as a pilot I've regularly flown their Cessna aircraft. This is a clear-cut case of Warren Buffett’s “stick with what you know” mantra.
It’s not because of my experience with Textron that I’m writing about it, however. It’s in spite of it.
Until now, I’ve been fairly averse to so much as looking at Textron. There’s no question that our current economy will have a markedly negative effect on the company’s performance right now. As other companies continue to cut back through 2009, the chances of a firm pondering the purchase of a corporate jet aren’t looking good. Likewise, the market for single-engine aircraft is highly affected by economic conditions – when people don’t have money they don’t buy planes.
The company’s Cessna cash cow isn’t immune to those factors.
Having said that, there are a couple of things that have made Textron difficult to ignore. For starters, its incredible value is compelling in and of itself. Second is the company’s backlog. While the market for private aircraft doesn’t look good for 2009, the fact of the matter is that Textron’s business segments currently have a backlog of $23.2 billion – meaning that they’re getting orders quicker than they can fill them. That’s a very good thing.
The company also isn’t resting on its laurels. In November 2007, Textron purchased Columbia Aircraft (now integrated into Cessna) for $26.4 million after a hailstorm severely damaged aircraft awaiting certification and delivery. The acquisition gave Cessna two new aircraft models, including the fastest fixed-gear single-engine airplane in production. Both have been extremely popular since Cessna resumed production.
Cessna’s in-house research and development is also roaring full speed ahead. In 2008, the company announced its newest business jet, the Citation Columbus. The Columbus will be the company’s largest-ever jet with seating for up to 10 passengers, and a range of up to 4,000 miles.
Faultless Financials
While the recession does provide concern for Textron, the company’s military contracting business, which provides more than 15% of revenues, should remain strong while the company waits out the economy.
Textron’s financial segment is another area that’s worried investors – the group actually recorded a loss for 2008. Because of a deteriorating credit environment, Textron has decided to close most of the Textron Finance arm. This is a good sign as it means the company will return to focus on its core competencies.
From a financial standpoint, Textron looks healthy. The company’s balance sheet looks strong, heavily weighted on the assets side. Textron’s debt load also looks palatable, helped in part by the drawing down of its $3 billion credit lines last week to repay its short-term debt and add liquidity to the balance sheet. The money isn’t due for repayment until 2012.
Wall Street wasn’t as receptive to Textron’s move to borrow the $3 billion, dropping shares to their lowest point in 18 years. That, incidentally, is the same time that subscribers added Textron to the portfolio in a Rhino Alert sent out on February 4. As of this writing, the position was up 23%.
From the income side, Textron reported an uncharacteristically weak quarter in their January 29 earnings call. The company recorded a net loss of $209 million compared with income of $256 million a year ago. Delving deeper, however, we can see that included in the quarter were the consequences of the decision to close Textron Finance down: a $293 million mark-to-market adjustment, a $169 million goodwill impairment charge, and a $31 million tax charge.
Indeed, despite the gloom and doom sentiment of Wall Street, Textron’s revenues actually increased slightly from the fourth quarter of 2009 to $3.6 billion.
You Won’t Believe These Dividends
But the most compelling part of the Textron story is dividends. As of right now, the recent drops in share price have lofted the company’s dividend yield to 15.1%. That means that regardless of what happens to the stock price in the near term, as long as the company continues to operate as it has been, you can expect a double-digit annual return paid quarterly in cash. That’s Textron’s selling point right now.
At its current price of $6.81, Textron is poised for some impressive growth over the next 18 to 24 months. Couple that with its impressive 15.1% dividend yield, and TXT begins to look hard to ignore.
Disclosure: TXT is a long position in the Rhino Stock Report’s model portfolio.
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TXT's Cessna business will also likely take a hit this year (as I mentioned in the article), but I think that order cancellations will be offset by the company's huge backlog.
Last quarter was dismal indeed, but if you remove TFC from the mix, Cessna and Bell actually performed pretty well. Given the company's value price, I think this bargain stock will fare well long-term.
While I would not mind a 50% cut in the dividend, the market has severely punished any company cutting its dividend, so I recommend TXT not do so.
My price target is 13 based on debt concerns. If TXT survives through 2012, it will be much higher than that, but the financial environment is so precarious that breaking up the company long before that point is also likely.
On Feb 11 08:35 AM jzkl1234 wrote:
> Do you really believe TXT is not going to cut it's dividend? Do you
> really believe TXT is not going to record more writedowns in TXT
> Finance? Do you realize TXT's interest expense is going up, not down.
> Do you really think they are not going to get further Cessna order
> cancellations this year?
The bonds are rated one notch above junk by Fitch (recent downgrade) now and I would not be surprized to see business to continue to deteriorate and some charges against receivables. I expect more downgrades.
With a 15% div yield on the common, the market is already discounting a dividend cut or elimination. Its's inevitable.
With the bonds, I'm not concerned about the stock dividend. I simply want enough cash flow from operations and/or asset sales to service the interest on the debt and to fund future debt amortization. I assume under a worse case scenario, I could own TXT fairly cheap under a Chp 11 restructuring.
On Feb 11 10:24 AM Jonas Elmerraji wrote:
> I think it's certainly possible that Textron may cut its dividend
> in the short-term. But I also think that if you're looking at a company
> like Textron, you have to think long-term, and I don't see this company
> withholding dividends from shareholders over a longer timeframe.
>
>
> TXT's Cessna business will also likely take a hit this year (as I
> mentioned in the article), but I think that order cancellations will
> be offset by the company's huge backlog.
>
> Last quarter was dismal indeed, but if you remove TFC from the mix,
> Cessna and Bell actually performed pretty well. Given the company's
> value price, I think this bargain stock will fare well long-term.
I agree that I think TXT is a good play at this level, it has a lot of great businesses with deep economic moats. However, it could be in real trouble with its financial arm and a chapter 11 filing possibility, where the equity holders are wiped out, is not that far fetched. However, if you think TXT will survive and not file chapter 11, there will likely be a substantial gain in the stock price in the coming years.
However, to suggest the stock is a buy based on its dividend yield is laughably foolish.
Yes, TFC has created a slew of problems for the company. Yes, those problems do threaten Textron's ability to deliver a dividend in the short term. But I don't think that what the company is going through now (which is purely thanks to the credit crunch) will be its undoing. It's my assertion that once that becomes clear to Wall Street, Textron's owners will be rewarded. We've certainly been rewarded since taking the position (you can see total returns at rhinostocks.com/member... )
Textron does have quite a bit of pressure to keep their dividends in place. That doesn't mean that they will when faced with the economic challenges the next couple of quarters will bring. That said, I think that over the long-term, the stock will recover.
Just as you shouldn't judge a book by its cover, please don't judge an article by its title - SA authors don't write them. Editors do.
"But the most compelling part of the Textron story is dividends. As of right now, the recent drops in share price have lofted the company’s dividend yield to 15.1%. That means that regardless of what happens to the stock price in the near term, as long as the company continues to operate as it has been, you can expect a double-digit annual return paid quarterly in cash. That’s Textron’s selling point right now."
Did the editors write that too?
No. I guess I should have said don't judge an article by its title/a single paragraph/a single sentence. Before the word "dividend" is so much as mentioned there are around a thousand words breaking down why TXT is a bargain stock right now. This article came from a GARP investment letter, and the income was worth mentioning for subscribers who don't hear about it much.
Dividends ARE important for Textron, and they'll continue to be, but only in the context of value. It's the value that makes the yield that high, after all. The two are invariably connected.
To suggest that TXT is a buy based on dividends ALONE would be foolish, but I don't think it's accurate to say that's what's going on in the article. I also don't think it's reasonable to think that Textron will slash its dividends completely this year and never ever pay them again -- that's why dividends shouldn't be left out of the investment equation here.
In Textron's current financial position, dividends are totally meaningless. I'd be surprised if they aren't suspended completely or vastly reduced at the next declaration date. If and when they are ever begin again, and at what level, is a total guess - but based on the current environment and Textron's debt position, it could be years before TXT delevers enough for management to feel comfortable paying out the 200MM+ in FCF the dividend represents . TXT is not a GARP stock since it isn't growing; a deep value play? Maybe.
Textron has a very real chance of having a liquidity crisis on its hands in the short term that could lead to its bankruptcy. It is a capital intensive business with a huge, massive pile of debt. If you have any doubts about this, look at the bond market. There is lots of TXT debt available with nearly 20% YTM on several issues. That doesn't happen unless there is a very real chance of bankruptcy.
I'm personally selling covered calls against my stock position, which are selling at a very high premium right now (March 7.5 calls, 50 cents out of the money, are selling for $1.05, or over 15% of the stock price.) I think if TXT does need to file, it won't be a while now.
I think that if you're looking at Textron as a going concern, dividends have to be included in the pot. TFC is the dark cloud that's lingering over the company right now, but if they can shed the division successfully in the next couple quarters they'll be in substantially better shape.
For now, liquidity is an issue for sure. Still, management has an aggressive liquidity plan in place that I'm betting will help the company hold out until they get their ducks in a row.
I'm sorry that you disagree with my rationale for holding Textron, but I do hope that the stock does well for you (for the obvious reasons).
Not that I'm one to gloat, but, I told you so.
[$$] Textron Makes 91% Cut in Dividend
-Chris
Overall, I think that the press release TXT put out today is favorable, especially when the market is fearing for the worst. The company may have cut dividends, but it didn't drop them. That's important. They also announced that their financial realignment of TFC is ahead of schedule.
Obviously I'd rather see them announce that they stuck gold underneath their corporate HQ, but if this is the earth-shattering news that the soothsayers have been proselytizing with, I'm fine with it.