Today Vulcan Material (VMC) filed a SEC document detailing $400M of new long term debt. The bonds yield 10.375% and 10.125%. That's about 8% more than Treasuries. The rates are punitive. The proceeds will be used to repay short term debt and maturing long term debt. Since they're paying 10+%, rather than using internally generated funds, for the funds necessary to repay debt, I assume that cashflow hasn't been robust.
If cashflow hasn't been robust, borrowing costs have risen, and projected net income is approximately 100% of VMC's dividend, why pay a dividend? Or why pay as large a dividend as they have been paying. With 110M shares outstanding and a $2 payout, cessation of the dividend would free up $220M to boost liquidity.
That's what a good businessman would do. Conserve the cash until better times. Don't gamble with having to go back to the banks again and pay a higher interest rate. Yes, shareholders will be disappointed, but the price will drop further if the company gets into really hot water down the road.
Every day it becomes clearer that the Obama stimulus is not going to be a road and bridge building bonanza. The numbers are puny compared to original hopes. That means that road building will not rescue residential and commercial shortfalls. Improvements in diesel and liquid asphalt pricing won't either. The quarterly numbers to be announced in early February will fall short of easily earning their dividend. Their guidance is likely to be hedged and paint 2009 as another difficult year.
At the high multiple that VMC is presently valued at there isn't any room for dividend cuts, lowered guidance, or the media tallying up the pittance in the stimulus devoted to roads and bridges. My short position can only improve.
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.
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