Activist Investor's Concerns Over Green Dot Are Overblown

| About: Green Dot (GDOT)

Summary

Green Dot is preparing to fend off calls from its largest shareholder to change board member composition.

Harvest Capital is concerned over declines in Green Dot's stock price because of mismanagement.

Hold Green Dot over the long term; the changes underway will improve stock performance over the long term.

Green Dot (NYSE: GDOT) touts itself as the inventor of the prepaid debit card industry. Over the years, it has maintained its place as the largest provider of reloadable prepaid debit cards and cash reload processing services in the U.S.

Despite its leadership in the space, there are rumblings among investors that it could be doing better. Complaints include declines in the company's stock, which is down roughly 70% since 2010 when it went public. This has particularly ruffled the feathers of Harvest Capital Strategies, Green Dot's largest shareholder, which has listed its concerns in a letter to shareholders.

While I agree with some of the concerns raised by Harvest Capital, steps that Green Dot has recently taken will play out in the long term, so I would not dump the stock now.

Let's look at some of the happenings that are underway at Green Dot now.

The disgruntled

While Green Dot's shareholders have had to deal with declines in the company's stock, one could say that the company had performed to the satisfaction of investors since none of them had raised concerns. That changed this year when one of the company's largest shareholders began demanding changes in the board of directors composition in hopes that electing new members could lead to changes in the C-Suite.

As it readies for its annual shareholder meeting, which is scheduled for May 23, Green Dot is contending with the rumblings of activist investor Harvest Capital Strategies. The hedge fund has a roughly 9% stake in Green Dot, owning about 4.8 million shares.

Harvest Capital has filed proxy materials with the Securities and Exchange Commission (SEC) in an attempt to make Green Dot's board of directors elect three new directors, which it has chosen. They are Saturnino Fanlo, George Gresham and Philip Livingston.

Green Dot followed with its own letter to shareholders, in which it nominated its own slate of candidates. They are incumbents Steven Streit, who is Green Dot's current chief executive officer, Timothy Greenleaf and Michael Moritz. In its letter urging shareholders to vote for these three, Green Dot stated that the three "possess a valuable combination of financial, technology and public company expertise that has been instrumental in guiding the company to its undisputed leadership position as the largest, most respected, highest revenue and most profitable prepaid company in America."

What's the problem?

Led by Joseph Jolson, Harvest Capital wants changes at Green Dot, maintaining that Green Dot has experienced double-digit percentage declines in its stock price in four of the last five years and a cumulative absolute share price decline of 71% since the end of 2010.

Harvest Capital wants changes at the top, particularly the replacement of Streit, but that may not happen because of some changes Green Dot is attempting.

Earlier this month, Green Dot announced it would increase the size of its board by appointing three new independent directors to the board, which would increase the number of seats to 10 from eight. That means that the directors Harvest Capital has nominated may not have as much influence in the running of Green Dot if they are elected. Simply, there could be less ability for these new board members to get rid of Streit.

Here's an excerpt from Harvest Capital's letter to shareholders:

"The board must be held accountable for years of poor performance and substantial shareholder value destruction. The board's recent and reactionary changes disenfranchise shareholders and fail to address Green Dot's long-term underperformance under CEO Steve Streit."

Harvest Capital said in its letter that it had remained loyal shareholders despite "management's broken promises, unrelenting execution failures, erroneous financial forecasts, and misleading investor communications."

In the letter, Harvest Capital also accused the members of the board of complacently turning a blind eye towards Streit's "undeniable performance shortcomings."

Changes are being made

As Green Dot prepares for this historic proxy fight with Harvest Capital, it has taken steps that are proving favorable to its stock performance. This includes an effort called the Six Step Plan, which Green Dot is hoping will contribute to it achieving an earnings per share of $1.75 by 2017.

When the company made that announcement in February, it also reiterated its commitment to spending an additional $50 million of its cash-on-hand this year as part of its previously announced $150 million share repurchase program.

More specifically, under the agreement, Green Dot will receive an initial delivery of approximately 1.9 million shares. The final number of shares to be repurchased and the aggregate cost per share to Green Dot will be based on Green Dot's volume-weighted average stock price during the term of the transaction, which is expected to be completed by November.

Green Dot states that it has now repurchased $100 million of its Class A common stock since September of 2015 when Green Dot's regulators first approved the program. Green Dot has stated that it is committed to executing the remaining $50 million under its $150 million repurchase authorization by 2017.

Other positive developments

On April 18, Green Dot announced that it had relaunched Money Pak, a service that allows buyers of its prepaid cards to reload them with cash at retailers. The product started rolling out to retailers earlier this month. Those retailers include Kroger (NYSE:KR) and Rite Aid (NYSE:RAD). This relaunch should contribute to the success of the Six Step Plan.

More positive news could come on May 4, when Green Dot reports its first-quarter earnings for 2016.

I understand the frustrations from investors, but I see Green Dot improving its financials and stock price over the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.