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Schnitzer Steel: The Dividend Is At Risk


  • Schniter's Q1 was very tough due to a shift in customer preferences and low prices.
  • The adjusted OpCF was just $11M (compared to almost $40M in Q1 FY 2019), and Schnitzer plans to invest $125M during this year.
  • This means the dividend, which costs the company north of $20M per year, is at risk if the situation doesn't change soon.
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Schnitzer Steel Industries (SCHN) has been around for a while as the company was created in 1906 and has since grown to be one of the largest recyclers of scrap metal (both ferrous and non-ferrous) in North America. It also operates the Pick-n-Pull brand, a self-service auto parts chain where customers can just take the desired parts out of a salvaged vehicle. Once that's been done, Schnitzer then usually just recycles the wreck itself.

The first quarter of 2020 (which ended in November) was tough for Schnitzer as it had to deal with disappointing volumes and prices. This weighed on the operating result and on the free cash flow performance, which turned negative.

Q1 2020 wasn't great, but Schnitzer claims to have a plan

According to Schnitzer, its first quarter was suffering from weaker scrap markets (both export and domestic) and a structural shift for certain non-ferrous projects. This structural shift has been ongoing for a while, and Schnitzer is still working on mitigating the impact of this shift by investing in metal recovery technologies while pursuing shipping higher volumes of ferrous products and improving the efficiency of its operations. Rome wasn't built in a day, and just like the construction of Rome, Schnitzer will need time to effectively and efficiently implement its plans. Schnitzer is dangling a carrot in front of its shareholders mentioning 'this will provide additional opportunities to grow and return more capital to our shareholders'.

Source: press release

Maybe that will indeed be the case, but near term, I'm mainly looking forward to seeing Schnitzer mitigating the impact of lost business.

In the first quarter of the (financial) year, Schnitzer's revenue fell from $564M in Q1 FY 2019 to just $406M in the current financial year. Yes, the COGS obviously decreased as well

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This article was written by

The Investment Doctor profile picture

The Investment Doctor is a financial writer, highlighting European small-caps with a 5-7 year investment horizon. He strongly believes a portfolio should consist of a mixture of dividend and growth stocks.

He is the leader of the investment group European Small Cap Ideas which offers exclusive access to actionable research on appealing Europe-focused investment opportunities not found elsewhere. The a focus is on high-quality ideas in the small-cap space, with emphasis on capital gains and dividend income for continuous cash flow. Features include: two model portfolios - the European Small Cap Ideas portfolio and the European REIT Portfolio, weekly updates, educational content to learn more about the European investing opportunities, and an active chat room to discuss the latest developments of the portfolio holdings. Learn more.

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Comments (6)

Little, Einstein profile picture
"Schnitzer has one thing going for itself: the balance sheet is actually quite robust. The company has $9.6M in cash on the bank and $1.4M in short-term debt and $127M in long-term debt, for a net debt position of around $119M"

That was to laugh $9.6M in cash,robust?
The Investment Doctor profile picture
I didn't call the cash robust. I called the balance sheet robust. With access to $581M of the credit line and a relatively low net debt, yes, that balance sheet is relatively robust in normal circumstances.
Dollarman1971 profile picture
Thanks for the article. I have been watching SCHN for about a year and like you have been on the sidelines. I like the yield though your article may be right that a cut could be in the future. Strong balance sheet, in an industry(ies) that will not go away (recycling and vehicle parts) and available cheap debt if needed are pluses to me. That said, I think the market needs more good news globally and SCHN can at least cover capex.
The Investment Doctor profile picture
Maybe I misread your comment and you intended it to sound as 'if there's more good news, Schnitzer will be able to cover capex', as right now, the capex is clearly uncovered.
Dollarman1971 profile picture
I see that my message wasn't clear. For SCHN to increase in value we need; 1. better economic news globally and 2. SCHN must at least cover CAPEX. That is what I meant.
The Investment Doctor profile picture
Gotcha. Yes, I fully agree! Sorry if I interpreted it wrong - it totally could have been me who created the confusion, I just got off two back-to-back intercontinental flights.
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