Will NutriSystem Shares Soon See a Dividend Cut?

Mar. 1.11 | About: Nutrisystem Inc (NTRI)

NutriSystem, Inc. (NASDAQ:NTRI) reported earnings and guidance last week (see conference call transcript here) which resulted in a major drop in the stock price. The shares traded for about $20 on February 24, and have since fallen to about $13.

Fourth quarter revenues fell to $87.9 million compared to $105.5 million in the same period last year. For the full year (2010), revenues were $509.5 million, down from $524.6 million in 2009. Earnings per share totaled $1.12 for 2010 vs. 92 cents per diluted share in 2009. Going forward, the company said it was seeing heavy competition and price discounts taking effect on financials results.

Here's a quote from their press release:

In the first quarter of 2011, NutriSystem continued to experience significant year-over-year declines in customer starts throughout the month of January. The Company’s diet season launch, which featured one free week and inclusion of frozen food at a reduced price, was ineffective in light of intense competitive activity and bargain-focused consumer behavior, despite new creative and heavy media spend in January. In response to these trends the company deployed new promotional strategies that improved customer response and conversion rates in the month of February. However, the disappointing results in January and continued expected competitive challenges have caused the company to forecast 2011 revenues and profitability below 2010 levels.

The news that NTRI was expecting to post a loss in the coming months has hurt the stock significantly. Here's what the company said:

We continue to expect a profitable year in 2011, with earnings in the range of 40 to 50 cents per diluted share and positive adjusted EBITDA. In the first quarter, we believe that reduced revenues, margin pressure, and one-time charges, including severance, will result in a forecasted first quarter loss of 30 to 35 cents per diluted share.

You can read the entire quarterly release here.

The company declared a dividend of 17.5 cents per share, payable March 17, 2011, to shareholders of record as of March 7, 2011. The annual dividend payout is 70 cents per share which is equivalent to a ~5% yield for these shares. I would have preferred that management cut the dividend now, rather than try to maintain an annual dividend payout of 70 cents per year.

With NTRI guiding earnings for 2011 down to a range of 40 to 50 cents, it makes me concerned that the dividend should be, and possibly will be, cut in the future. It makes no sense to me for NTRI to pay 70 cents per year in dividends, when they are expecting to earn only 40 to 50 cents per share. Had they cut the dividend now, they might have seen a more severe selloff and perhaps they feel it's better to cut the dividend later to minimize damage to the stock.

The dividend is clearly providing some support for the stock price now. I fear that NTRI will have a hard time putting in a real bottom until all the bad news is priced in, which may include the need for a substantial dividend cut in the near future. NTRI has been paying dividends since May 2008. This limited dividend paying history makes me less secure that dividends at the rate of 17.5 cents per quarter will be maintained. You can see NTRI's dividend payment history here.

With the shares hitting new 52 week lows on Friday and again yesterday, there is no clear sign of a bottom yet. The shares are trading well below the 50 and 200 day moving average. The volume of shares traded since Friday have been many times higher than average, and this could point to at least a short term bottom.

Due to my concerns that the dividend will be cut at some point, I am holding back on any large purchase of these shares for now. However, at only about $13,22 per share, these shares could have rebound potential. I bought a small position today at $13.22. I will be watching these shares closely for more signs of a bottom, before adding in any larger purchases.

Data is sourced from Yahoo Finance, SEC filings and the NutriSystem, Inc. website. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I am long NTRI.