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Macy's may have just signaled a dividend cut

Brian Sozzi
Editor-at-Large

After a pretty disastrous underperforming 2019, executives at Macy’s (M) may finally be opening up to cutting its dividend as a means to preserve precious cash.

“We remain committed to paying an appropriate cash dividend to our investors,” Macy’s CFO Paula Price told analysts on an earnings call Thursday. Analysts on the call quickly zeroed in on Price’s use of the word “appropriate” as a signal for a potential slashing of the dividend.

Price did her best to assure investors the dividend is safe. But the signal was clear to anyone on the Street that has followed Macy’s for a while, one industry insider tells Yahoo Finance.

The dividend is at risk.

“Our board approves our dividends quarterly. We review that with them. And we don't have plans near-term to change our dividend, but we continue to evaluate it in the context of our capital allocation as well as our strategic plans more broadly. And so we're well aware that with the drop in our share price, our dividend yield is now outsized. But having said that, dividend yield is but one metric that we think about when we're thinking about our dividends and our dividend policy, and it's not one that we wholly control. And so when we think about what is appropriate, again we evaluate that in the context of our capital allocation framework and then our broader strategic plans,” Price explained.

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Dividend ‘unstainable’

As Yahoo Finance wrote back in August, it makes no sense that Macy’s is shelling out $463 million in dividends a year at a time when its business is getting worse. Macy’s stock now has a dividend yield of 10.3%, fueled in large part by the plunge in value over the past two years (down 39%). That qualifies Macy’s as a distressed entity in the minds of most investors.

“With Macy’s stock declining 50% in the last year, its dividend yield has nearly doubled to 10% — a clear indication the market views it as unsustainable,” said Morgan Stanley retail analyst Kimberly Greenberger. “We expect Macy’s may need to cut its dividend in the next two years if it unable to stabilize cash flow.”

CHICAGO, ILLINOIS - NOVEMBER 21: Pedestrians walk past a Macy's store downtown on November 21, 2019 in Chicago, Illinois. Macy’s Inc. reported a drop in third quarter sales and said the company is anticipating a weak holiday quarter as they, like other department stores, struggle to continue to attract customers. (Photo by Scott Olson/Getty Images)

Nothing in Macy’s third quarter suggested cash flow will stabilize anytime soon. The company posted a 3.5% same-store sales drop, ending a streak of seven quarterly gains. Adjusted earnings crashed to 7 cents a share from 27 cents a share last year. Full-year earnings guidance was revised down to $2.57 to $2.77 a share from $2.85 to $3.05 previously.

More worrisome, Macy’s total cash flow fell to $351 million for the 39-weeks ended Nov. 2 from $777 million a year ago.

Macy’s halving the dividend or doing away with it entirely would no doubt pummel the stock into the ground further. But at this point, Macy’s management would be wise to batten down the hatches and reallocate those dividend funds to closing 300-plus underperforming stores it’s not investing much in right now.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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