Scotts Miracle Gro (NYSE:SMG) is taking a beating in after-hours trading. It is trading down $6.60 or 15.3% at $36.45 in extended trading. It closed the regular session at $43.05.
Why the sell-off?
Scotts provided updated guidance that disappointed. It expects to fall short of its $2.65 to $2.85 earnings guidance. The news release can be read here:
The Board and management clearly think the stock is worth more than current levels having spent $401.2 million to repurchase 7.9 million shares since the inception of the program in 2010. The average cost of shares repurchased is $50.78 or $6.57 per share outstanding (61.090 million) as of May 4, 2012.
The Board of Directors authorized spending up to $700 million to repurchase shares, thus there is roughly $300 million remaining. Source 10-Q
Might the Board decide to provide some of the remaining share repurchases allocation for the payment of dividends? Time will tell. Scotts on August 8, 2011 increased its quarterly dividend to $0.30 from $0.25. At $36.45 this is a 3.29% dividend yield. If the Board increased the quarterly dividend another nickel in August to $0.35 a quarter, then at current prices the dividend yield would be 3.84%. As of May 2012 there were roughly 61 million shares outstanding therefore the increased dividend would cost nearly $12.2 million extra a year or about 4% of the funds remaining in the allocation to repurchase shares. There is room to grow the dividend if the Board has confidence in the business.
The decline in the stock price has made the issue more attractive based on its dividend yield. Though more risk adverse investors might want to check out the 6.625% bonds due December 15, 2020. It is a high yield issues rated BB by S&P and B1 by Moody's, according to data provided at the FINRA website.
Over the years I have noticed the issue experiencing massive sell-offs, but it can rebound if one is patient. The SMG dividend may help investors have some patience. Though nimble traders might see a quick 5% to 10% bounce to $38-$40 over the next few days or weeks.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SMG over the next 72 hours.