What happened
Extending the 25% plunge they experienced in May due to an uninspiring first-quarter earnings report, shares of Green Plains (GPRE 0.75%) fell 17% in June, according to data from S&P Global Market Intelligence. Although the company's decision to suspend its dividend represented the primary reason for the stock's decline, management's questionable approach to capital allocation provided investors with more cause for concern.
So what
In the press release that announced the suspension of the quarterly cash dividend, Green Plains stated its belief that the move "enables us to expedite our investments into our Project 24 initiative, which is expected to significantly reduce our ethanol production operating costs, and support deployment of our high-protein feed technology across our production platform."
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The contraction in the company's ethanol production margin was a standout in its Q1 2019 earnings report. Green Plains reported a consolidated ethanol crush margin -- the metric that represents ethanol production profitability -- of negative $0.08 per gallon in the first quarter of 2019, representing a significant turnaround from the positive $0.05 the company generated during the same period in 2018.
In addition to suspending the dividend, Green Plains announced that it had secured a debt offering of $105 million in convertible senior notes due 2024. The company intends to use about $58 million of the raised capital to retire $57 million of the outstanding principal amount of its 3.25% convertible senior notes that are due in October.
Of greater concern, however, is what the company intends to do with the remaining capital: repurchase shares. With the announcement that Green Plains had completed the debt offering, it also reported that it had used about $40 million of the net proceeds to repurchase approximately 3.2 million shares of common stock. And additional buybacks may be on the way. Management has targeted stock buybacks in total of $80 million, pursuant to a repurchase program authorized in 2014.
Now what
It's clear why shareholders of Green Plains abandoned ship with the news of the dividend cut, considering the company's past performance. Over the past three years, shares of Green Plains have plummeted 51% while the S&P 500 has risen 42%. While shareholders recognized no capital appreciation, the company's consistent quarterly dividend of $0.12 per share (distributed quarterly since Q3 2015) provided some solace. Of greater concern, however, is management's decision to buy back stock in an effort to appease investors, a move that is far from a guarantee to increase shareholder value. In the coming quarters, investors should closely monitor the ethanol crush margin to see if the Project 24 initiative is bearing fruit, something that may portend the return of the dividend.
