This post is partly an attempt to warn dividend investors out there and partly fueled by frustration based on this news
3G are a Brazilian private equity firm that take on mountains of debt to acquire companies in the food industry. They then proceed to "unlock value" by slashing expenses to try and boost margins. Three companies that 3G runs are BUD (already cut their dividend), KHC and QSR (Burger King, Tim Horton's and Popeye's). Normally, I'd understand a dividend cut if the economy as a whole was struggling. The dividend cuts announced by BUD and KHC were brought about by bad capital management, which should concern every investor.
I wouldn't be surprised if QSR announces a dividend cut over the course of the year. Let's take a look at their balance sheet. The numbers I have below are their TTM values as per Morningstar.
EBITDA ~ 2 billion
Long term debt ~ 11.7 billion
Debt/Ebitda is a whopping 5.85. Normally, a ratio less than 2.5 is considered safe. 5.85 should start ringing warning bells.
Interest coverage ratio ~ 3.85. That means approx 28% of their earnings go towards paying JUST interest on their debt.
Their free cash flow was 1.134 billion of which 730 million was paid in dividends. That leaves just 400 million a year to finance their monstrous debt or buy back any stock.
But doesn't Berkshire Hathaway own 25% of KHC ? Surely that must mean it'll do well. Well, BRKs cost basis for their stake in KHC was approx 10 billion https://www.cnbc.com/2018/02/24/buffett-reveals-berkshires-15-largest-stock-holdings--including-apple-wells-fargo.html. They are still very much in the money.
It is also a very small part of their market cap. They can wait and ride out the storm (or shake things up if they need to).
Can a small time investor who is looking for reliable dividends from a consumer staple do the same? I know I wouldn't be comfortable investing in a stock like this.
I do think these companies will be fine in the long run. The brand names are iconic enough that if 3G continues screwing up, other activist investors might show up.
The 3G model involves cutting the dividend if there's a slight misstep in the execution of their plan. As a conservative investor who likes sleeping well at night, I can't say I'm comfortable investing in companies run by them. I'd like to consider myself a buy and hold type investor, but if 3G ever bought into any company I own shares in, I wouldn't hesitate to close my position.
Submitted February 21, 2019 at 07:18PM by vipnasty https://ift.tt/2E0U6Zp
