Weyco (WEYS): Lost Dividend Champions Status
A Dividend Champion rarely loses its status. Most companies with long streaks of dividend raises do not like to cut or freeze their dividends. They will often be creative to avoid losing their dividend streak status because investors may sell their position. A dividend cut and a dividend freeze, to a lesser degree, are often triggers for selling a dividend stock. However, Weyco Group (WEYS) lost its Dividend Champion status after 39 years of dividend increases. Despite the change, long-term owners of the stock may still want to hold on to Weyco since the dividend yield is still 4%+ combined with acceptable dividend safety metrics.
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Overview of Weyco Group
Weyco was founded in 1892. The company was initially known as Weyenburg Shoe Manufacturing. After leaving the Florsheim Shoe Company, Thomas Florsheim Sr. invested money in the company. When Florsheim Shoe Company declared bankruptcy in 2002, Weyco acquired some of its assets.
Today, Weyco sells men’s dress, dress casual, and outdoor footwear. The leading brands include Florsheim (men’s leather dress and casual shoes), Nunn Bush (men’s dress and casual shoes), Stacy Adams (urban men’s footwear), BOGS (outdoor and work boots), and Forsake (outdoor footwear). In addition, the company closed its Rafters and Umi brands.
Weyco sells shoes wholesale, mainly through department stores and national shoe chains in the US and Canada. Additionally, Weyco operated four Florsheim retail stores in the US at the end of 2021 and sold directly online through its websites.
The company owns Florsheim Australia, which operates in Australia, South Africa, and the Asia Pacific. Additionally, Weyco owns Florsheim Europe, but this business is being shuttered. Weyco also licenses its brands in the US and Mexico. Total revenue was approximately $267.6 million in 2021.
Weyco is controlled by the Florsheim family, who collectively own about 48% of the stock. The Executive Chairman, CEO, and COO of Weyco Group are descendants of the founder of the Florsheim brand.
Weyco Lost Dividend Champions Status
Weyco had paid an increasing dividend for 39 years, making the stock a Dividend Champion. The company was on the Dividend Champion 2021 list from different sources. In addition, the yield was around 4%. However, according to Portfolio Insight*, the quarterly dividend rate was kept constant at $0.24 per share in 2020 and 2021, and consequently, the annual rate was $0.96 per share in both years. This action effectively ended Weyco’s streak of dividend increases at 39 years, meaning the company lost its Dividend Champion status.
Weyco did not raise the dividend mainly because of the combined impact of COVID-19, the already high dividend yield, and share repurchases. The changes caused by COVID-19 and the increased acceptance of hybrid work mean men will probably buy fewer dress or business casual shoes. When combined with the already high yield and focus on share repurchases, the company probably decided not to increase the dividend. We discuss all three reasons below.
Impact of COVID-19
COVID-19 decimated Weyco’s sales in 2020. The company’s focus is men’s dress and dress casual shoes. As local and state governments mandated business and retail closures, these two categories struggled. These actions caused demand to plunge, and the ability to sell shoes declined.
Men buy brands like Florsheim, Nunn Bush, and Stacy Adams for use in the office, entertaining, or social gatherings. Office, restaurant, and entertainment venue closures caused a drop in demand. In addition, malls and other retail locations were closed for periods. Since Weyco sells primarily through department stores and national shoe chains, customers could only buy its products online.
The outcome was lower volumes and sales. In 2020, Weyco’s brand sales dropped by more than (-50%) to (-90%) in some quarters compared to 2019. Revenue plunged too in both the wholesale segment and Weyco’s own stores. The tables below illustrate the dramatic declines.
Sales Decline by Brand
| Brand | Q1 2020 | Q2 2020 | Q3 2020 |
|---|---|---|---|
| BOGS | -22% | -30% | +6% |
| Florsheim | +4% | -90% | -58% |
| Stacy Adams | -23% | -89% | -55% |
| Nunn Bush | -8% | -68% | -32% |
Revenue Decline by Segment
| Segment | Q1 2020 | Q2 2020 | Q3 2020 |
|---|---|---|---|
| North American Wholesale | -11% | -80% | -35% |
| North American Retail | -15% | -33% | -15% |
| Other | -32% | -59% | -50% |
Diluted Earnings Per Share
| Q1 2020 | Q2 2020 | Q3 2020 |
|---|---|---|
| $0.12 | ($0.91) | ($0.60) |
Weyco continued to pay its dividend during this challenging time because of its fortress balance sheet. The retailer had nearly $90 million in cash, cash equivalents, and marketable securities on its balance sheet. This value does not sound like much, but Weyco’s dividend only required $9.4 million in dividends, meaning it had more than enough cash to pay the dividend.
Already High Dividend Yield
Weyco had a high dividend yield of 5%+ during 2020. The dividend yield has been more than 4% for most of 2020 – 2022, as seen in the chart from Portfolio Insight*. This percentage is more than the trailing 5-year average and is one of the highest yielding Dividend Champions. It is possible that management decided in part not to raise the dividend because the dividend yield was already so high. Furthermore, although the payout ratio is relatively conservative, the dividend as a percentage of FCF is high. This fact may have caused the company to freeze the dividend until operating revenue recovers.
Focus on Share Repurchases
However, Weyco took advantage of the low stock price during the pandemic to repurchase shares. Even when earnings were negative, the company was still buying back shares. The share count was about 11.8 million in 2008 and was roughly 9.6 million at the end of 2021. This change represents an almost 20% decrease in 13 years. Weyco is willing repurchase shares at the expense of dividend growth.
Weyco’s Dividend Safety
Despite the challenges faced by the shoe retailer, the company still has acceptable dividend safety based on earnings, FCF, and the balance sheet. Investors disappointed by Weyco’s lost Dividend Champion status are still getting an excellent dividend yield of ~4% based on an annual dividend rate of $0.96 per share. The dividend yield is still about three times the average yield of the S&P 500 Index.
We estimate adjusted earnings per share of $2.14 per share in 2023. The forward annual dividend rate is $0.96 per share, giving a payout ratio of around 45%. This value is conservative and below our target value of 65%.
Additionally, the FCF should cover the dividend in most years. In 2021, operating cash flow (OCF) was $6.39 million, and FCF was $5.38 million. The dividend required $9.35 million, giving a dividend-to-FCF ratio of roughly 173%. This value suggests the dividend is not safe. However, the year 2021 was not a typical year for Weyco. In 2019, OCF was $9.39 million, and FCF was $2 million. In 2018, OCF was $13.05 million, and FCF was $11.64 million. These values indicate FCF is volatile and covers the dividend in some years but not others.
Weyco’s dividend safety is enhanced by the conservative balance sheet and net cash position. At the end of 2021, the company had $19.71 million in cash and cash equivalents, $8.34 million in short-term investments, and $10 million in long-term investments.
There was no short-term debt, current long-term debt, or long-term debt, and thus debt does not pose a risk to the company’s dividend. The only debt Weyco has is capital leases.
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Final Thoughts on Weyco (WEYS): Lost Dividend Champion Status
Although I have written positively about the company before, Weyco is not a company for everyone. The dividend freeze occurred due to the negative impact of COVID-19. Weyco recovered, and the fourth quarter of 2021 results was better than the fourth quarter of 2019. Dividend growth investors may no longer desire to own Weyco, but it does provide reasonably safe income.
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Published at Thu, 05 May 2022 04:00:00 -0700
