Under Armour's Ability And Intent To Pay A Dividend

Aug.29.14 | About: Under Armour, (UA)

Summary

Under Armour currently pays no dividend and sports a market cap of $12 billion.

Given the trend of active lifestyles, the company enjoys a widening customer base.

Unfortunately, the shares are too richly priced, and a dividend would not be meaningful when compared to potential downside in the stock.

After looking at the Keurig Green Mountain (NASDAQ:GMCR) dividend and the Walmart (NYSE:WMT) dividend earlier this year, there was some reader feedback requesting that I analyze companies that might qualify as dividend growth investments. My intention with this article is to look at Under Armour (NYSE:UA), a richly valued growth company in the apparel space. With regards to dividends, I prefer to look at the Cash Flow Statement to gain an understanding of the cash flow that an enterprise can generate.

Cash Flow Summary, ($ in millions)

Six Months

ending 6/30 2014

FYE 12/31/13

Six Months

ending 6/30 2013

Net income

$31

$162

$25

Depreciation and amortization

$34

$51

$24

Investments in inventory

($195)

($157)

($175)

Accounts payable

$175

($19)

$78

Net cash provided / ( used) in operations

($46)

$120

($90)

Purchases of property and equipment

($69)

($88)

($40)

Payments on revolving credit facility

($100)

$100

-

Proceeds from long term debt

$150

-

-

The below is taken from the balance sheet.

6/30/14

12/31/13

6/30/13

Cash and equivalents

$300

$347

$224

Inventories

$662

$469

$491

Click to enlarge

The capital investments have included expanding the in-store fixture and branded concept shop program, improvements and expansion of the distribution facilities, and leasehold improvements to the brand and factory house stores.

The company is investing huge amounts in inventory, and in the first half of this year, spent $195 million on this initiative. Inventory control requires putting systems and processes in place to improve forecasting and supply planning capabilities. Other key areas of focus to enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling excess inventory through factory house stores and other liquidation channels.

In December 2013, UA completed the acquisition of MapMyFitness. The purchase price was initially funded through $50 million cash on hand and $100 million in debt under the revolving credit facility. In May 2014, UA repaid the $100.0 million with a portion of the $150.0 million proceeds from the initial term loan under a new credit facility.

The company has made the decision to not pay a dividend, and the above chart shows that the company is intent on making investments in inventory. The business is also highly seasonal, and a quarterly dividend may not be appropriate for this type of firm.

Historically, UA recognized a majority of revenues and income from operations in the last two quarters of the year, driven primarily by increased sales volume of products during the fall selling season, including the higher priced cold weather products, along with a larger proportion of higher margin direct to consumer sales.

However, the company has large cash balances and produced free cash flow in FY 2013. My calculation of free cash flow is as follows for that period (in millions of dollars for FY 13):

Cash from operations

$120

Capex

($88)

Free cash flow

$32

Click to enlarge

Given the state of the credit markets for corporate borrowers, the growing net income and the liquid balance sheet, a dividend of $20 million annually is not risky. Given 212.8 million shares outstanding, this only amounts to about 10 cents per share. Remember this trades at $70 per share, so a 10 cent annual dividend would yield about 0.1%.

Net revenues by product category

(in millions)

Six months ending 6/30/14

Six months ending 6/30/13

Apparel

$879

$656

Footwear

224

162

Accessories

111

87

License and other revenues

37

21

Total net revenues

$1,251

$926

Click to enlarge

Under Armour can be found in all sorts of stores, but no store sells more of it than Dick's Sporting Goods (NYSE:DKS).

Conclusion

I conclude that UA could pay a dividend and it would not be reckless to pay about 10 cents per share in the fourth quarter of each year. However, I don't think the company will do this until the footwear and licensing businesses are much more robust.

Today, an upstart company with an experimental product like Under Armour might never find its way into influential locker rooms. Sponsors won't allow it. Last season, the NFL fined Cam Newton, the Carolina Panthers QB, ten thousand dollars for using visor clips that show Under Armour's logo. In years past, players in the NFL and equipment managers were not so constrained. This is very positive for Under Armour as it may limit competition to Adidas, Nike and Reebok.

Also, I believe there is an increasing recognition of the health benefits of an active lifestyle, and this trend provides Under Armour with an expanding consumer base. However, given that the shares are so richly priced at 90x earnings, investors should look elsewhere for share gains and dividend growth.

The above article is an opinion of the author and does not represent investment advice.

Disclosure: The author is long WMT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.