Office Depot (NASDAQ:ODP) came across our desk as a potential value play. The firm recently announced its fourth-quarter numbers where EPS of $0.12 beat consensus by $0.03 per share. Since that announcement, shares remain down at just above $2.43 per share. This means shares are presently trading with an attractive earnings multiple of 13.53. The downturn has also spiked the dividend yield to 4.12%.
Office Depot is transforming at present in an attempt to be much more predictable with respect to sustained growth. We know where management is coming from here. The financials, for example, over the past decade show negative earnings in 2010, 2012, 2013 and 2014. With respect to top-line sales, the firm is turning over approximately $1 billion less than it did a decade ago.
Where the firm has excelled though (which shareholders will hope will continue) is how operating costs specifically have come down in recent times. Whereas top-line sales have fallen by 8.5% since 2010, operating expenses have come down by approximately 36%. We saw once more on the fourth-quarter earnings call how management has gained momentum in this area. Management cited that its BAP (Business Acceleration Program) exceeded objectives for the year and as a result, delivered meaningful cost-savings which made themselves evident in the numbers.
It will be interesting to see if BAP can continue to improve operating performance for the firm. As investors, we would not like to depend on this happening for years on end, especially at the clip we witnessed in 2019.
What we need to see happen is sustained growth in the company's B2B businesses as well as its BSD division. Sustained sales growth specifically in these areas would significantly change the company's present valuation and reward shareholders as a result.
Therefore, on that note, let's see how the firm's 2019 numbers have impacted the viability and sustainability of that 4%+ dividend yield.
Before we dive into the dividend metrics, it is worth looking at the technical chart. As we can see above, shares may be in the process of undergoing a double-top reversal pattern. In fact, the longer price stays below the 10-day moving average, the more probable that this pattern will play out in the near term.
As mentioned, Office Depot's yield comes in at 4% and growth has been flat at $0.10 annually per share over the past few years. Although ODP's yield may be well above the 2.56% average in this sector, some investors will not like the fact that management has not been growing the pay-out.
For example, when we go to the cash-flow statement we can see that the affordability has been definitely there. Free cash flow came in at $216 million in 2019. Out of this kitty, management was able to divert $55 million to the dividend, $49 million to share buybacks and also close to $100 million to its debt. Furthermore, there was sufficient operating cash flow to pay for capital expenditure for the firm's B2B platform to the tune of $150 million in 2019.
With respect to future trends, assuming no curveballs from the likes of the coronavirus, management expects that Office Depot will generate approximately $300 million in adjusted free cash flow in 2020. This straight off the bat signals that the dividend should be well covered once more going forward. Revenue is expected to hit $10.5 billion, so the firm will be looking once more to BSD and CompuCom to drive that top-line number forward. The firm's BAP initiative will also be expected to make a meaningful impact in 2020.
Therefore, based off these top-line numbers, we may get a slight increase in EPS in 2020. We see no risk whatsoever to the dividend, assuming, of course, economic conditions do not tighten significantly. The market does not seem convinced though as of yet. As alluded to earlier, we would not be rushing to get long here considering where shares are trading at present. Let's see if the share price can push itself above the 10-day moving average in the near term which would take the potential double-top reversal pattern firmly off the table.
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