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Diebold (NYSE:DBD) is (or was?) one of the most illustrative dividend growth stocks available on the US Dividend Champions list with a track record of increasing its dividend for the last 60 years, a streak longer than other stock in the US market. The Company currently supports meaningful dividend yield of 3.4%, but the recent weak performance and projected outlook leaves a lot to be desired.

I. COMPANY OVERVIEW

Diebold is engaged in providing integrated self-service delivery and security systems and services to the financial, commercial, government and retail markets. Sales of systems and equipment are made directly to customers by the Company's sales personnel, manufacturers' representatives and distributors globally. The Company is best known for their design and manufacture of ATM for the financial industry.

II. HISTORICAL PERFORMANCE

 20082009201020112012
Revenue$3,081.8$2,718.3$2,823.8$2,835.8$2,991.7
% Growthn/a-11.8%3.9%0.4%5.5%
Gross Profit800.5662.8721.3750.5740.5
% Margin26.0%24.4%25.5%26.5%24.8%
EBITDA339.5229.4255.9257.2239.1
% Margin11.0%8.4%9.1%9.1%8.0%
Net Income88.626.0-20.3144.878.5
Avg Diluted Shares66.566.965.964.863.9
% Growthn/a0.6%-1.4%-1.7%-1.4%

Note: All figures are MM's (except per share data) unless noted otherwise

Diebold has performed poorly over the last five years. The Company's revenue contracted only once (during the recession) at a rate of 11.8% in 2009. As a result of the one year contraction, the Company's compounded annual growth rate was -0.7% over the past four years. The gross margin has trended negatively staying within a tight 2.1% range over the past five years (toughing at 24.4% and peaking at 26.5%). Similarly, EBTIDA Margins have contracted from 11.0% in 2008 to 8.0% in 2012 resulting in EBITDA compression from $339MM in 2008 to $239MM in 2012 (30% contraction) over the five year period.

Per Share Data
 20082009201020112012
Revenue$46.35$40.65$42.85$43.77$46.81
% Growthn/a-12.3%5.4%2.2%6.9%
Gross Profit12.049.9110.9411.5811.59
EBITDA5.113.433.883.973.74
Net Income1.330.39-0.312.241.23
Dividends1.001.041.081.121.14
Payout Ratio75.1%267.2%n/a50.1%92.9%
Dividend Growthn/a4.0%3.8%3.7%1.8%

Note: Per share data based on weighted average diluted shares outstanding.

On a per share basis, there isn't much additional to identify. The Company had relatively flat weighted average shares outstanding, only slightly decreasing from 66MM to 64MM over the period (a 3.9% decrease). EBITDA per share has contracted from $5.11 to $3.74 (a 27% decrease as compared to a 30% decrease at the Company level). The Company's dividends per share have been growing, increasing from $1.00 per share in 2008 to $1.14 per share in 2012 (a 14% increase or a 3.3% compounded annual growth rate) while the payout ratio has increased from 75% to 93%.

III. CAPITALIZATION

 Market / Par ValueEBITDA Multiple
- Cash and Equivalents$4062.0x
+ Total Debt$5882.8x
+ Minority Interest$210.1x
+ Market Capitalization$2,16910.5x
Total Enterprise Value$2,37311.5x

Note 1: Based on TTM EBITDA of $207MM as of 9/30/13.

Note 2: Market Cap based on 63.8MM shares outstanding and a $33.98 market price as of 1/14/14.

Diebold has a low net leverage capital structure. The Company is levered at 2.8x TTM EBITDA (0.9x net of cash) with a total enterprise value of 11.5x TTM EBITDA. Normally I'd like the Company to incur a little bit of low cost debt to leverage their equity returns, but in this case I believe the capital structure is warranted given the trends in the business.

IV. PROJECTIONS

 20132014201520162017
EBITDA$213.7$232.3$277.8$277.8$277.8
% Growth-10.6%8.7%19.6%0.0%0.0%
Interest Expense29.729.729.729.729.7
Taxes-99.0-109.8-136.1-136.1-136.1
Capital Expenditures40.944.453.153.153.1
Dividends73.473.473.473.473.4
Addl' FCF$168.8$194.6$257.7$257.7$257.7

Note: All figures are MM's (except per share data) unless noted otherwise. Consensus Estimates only relate to EBITDA projections. All other assumptions are based on unadjusted LTM actuals.

The consensus estimates for Diebold are aggressive projecting a growth rate between 19.6% and -10.6% annually through 2015 at the EBITDA line (projections unavailable for 2016 and 2017). Under the consensus case the Company is projected to have varying amounts of free cash flow available to reinvest in the business, repurchase shares (always assumed for modeling purposes), or increase the dividend.

 20132014201520162017
Addl' FCF$168.8$194.6$257.7$257.7$257.7
Share Redemption Price$39.08$44.94$51.68$59.43$68.35
Shares Redeemed4.34.35.04.33.8
Wtd Avg Diluted Shares59.655.350.345.942.2
Dividends Per Share$1.23$1.33$1.46$1.60$1.74
Dividend Growth8.1%7.8%9.9%9.4%8.9%

The share redemptions are assumed to be at a 15% annually compounded price. I believe that this is structured very conservatively. If the weighted average redemption price exceeded this threshold, the investor would have ample opportunity and time to re-evaluate their position and consider selling their position for a gain from today's price. The Company's share redemption would allow for a 8% to 10% increase in the dividend annually from the share redemptions alone. Additionally, the Company's payout ratio would decline as the dollar amount of dividends paid would not be increasing while the Company's earnings (using EBITDA as a proxy) would be increasing.

If the Company performs in line with the consensus estimates and pay dividends / redeems shares as outlined above, the Company would achieve the IRR / Cash on Cash returns illustrated below based on the outlined terminal EBITDA multiples.

Returns Based on Terminal EBITDA Multiple
 9.0x9.5x10.0x10.5x11.0x11.5x
IRR15.5%17.2%18.7%20.2%21.7%23.8%
Cash on Cash1.73x1.82x1.92x2.02x2.12x2.26x

V. RECOMMENDATION

Although the returns look to be attractive if they hit the consensus estimates, I think there is significant risk to both: (1) achieving the $278MM of EBITDA in FYE 2015; and (2) maintaining the ~11x+ EBITDA multiple in the long run. That compounded with the trends in th business is too much risk for a 3.4% yield with limited growth prospects. I think investor's money is better off elsewhere. For current holders of the stock, what's your thesis for maintaining your hold?

Source: Diebold: This Dividend Champion's Light Dims