Staples (SPLS, Financial) stock got demolished upon the busted deal with Office Depot (ODP, Financial). This provides an interesting opportunity for the value investor, as the stock's dividend yield is 5.27%.
As of today, the dividend that Staples pays is 48 cents. That 5.27% dividend yield is greater than just about anything you can get in the bond markets, or at a bank. The 52 week low is $8 a share and 52 week high $14.72.
A federal judge sided with the Federal Trade Commission that the merger would thwart competition. The deal was blocked back in May and Staples's shares fell like a stapler falling off a desk. In this analyst's humble opinion, the merger should have gone ahead. Why? Brick and mortar office supply retailers will face competition from Amazon and other internet based suppliers. Staples and Office Depot are in a dying industry and that's what companies do in dying industries. They merge so there is less competition.
Staples announced that it is looking to cut $300 million in costs and close stores in the U.S. and Europe. Staples had to pay Office Depot a $250 million break-up fee. Yikes!
Spin-offs, mergers, acquisitions and busted deals can present the value investor with excellent opportunities. Why? Uncertainty. The average investor does not have the time to look through these companies and determine if they are investment worthy. Another reason is that the selling volume for a busted deal like this is so great, it gives a buying opportunity.
First Quarter sales were down 3.1% from 2015. GAAP earnings per share were down to 6 cents from 9 cents in the first quarter last year. The balance sheet is robust. There is $946 million in cash and $1.846 billion in accounts receivable. The liability side shows $2 billion in accounts payable and $3.5 billion in debt. Management gave guidance of $600 million in free cash flow. With 646.29 million shares and a 48 cent dividend, the annual payout is $310 million.
I called the Investor Relations department and spoke with Chris Powers. I must give kudos to Staples in that they have one of the nicest IR teams I've ever spoken with. Powers promtly returned my phone calls and answered my questions.
So, if the stock traded up to a 4% dividend yield, the stock would rise to $12 a share. At $9.19 a share, that would be a 30% rise. Plus, what you would make in dividends while you wait. We own shares for clients and are at a small profit. It's not a long term hold. The industry is shrinking and faces too much competition from online sales. Having said that, it's low-hanging value investing fruit.
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