In many ways, I'm a fan of bad businesses. I mean it. Look around and you'll see that there's a lot of truth to Peter Lynch's assertion that the best company in a miserable market can make a great investment. (Think steelmaker Nucor
All the more reason, then, for my interest in United Online
United is hedging against this development by rolling out voice over Internet protocol (VoIP) service for its subscribers in Q4. Of course, that puts it in conflict with all sorts of other competitors, including eBay
Best of all, however, United's cash flow steadily increased. Cash from operations, for example, rose to $41.9 million, up 44% from the same period a year ago. That's good, because there's been criticism leveled at United Online that its declining Net access business wouldn't be able to produce the cash flow needed to fund its meaty 6.1% dividend yield. There's just one problem, though: The critics may not be wrong.
Allow me to explain. United Online first began paying a dividend in June. At the same time, the company grew its short-term credit, boosting its accounts payable and accrued liabilities by roughly $11.8 million. With fewer bills to pay, United's operating cash flow ballooned by 43% year over year. And, of course, headroom was made to give shareholders their due.
Fast-forward to Wednesday's earnings report. It's the same pattern. Payables and accrued liabilities were down $1.2 million in last year's Q3. This year? They're up more than $14 million.
Now, what do you think would happen to United if it couldn't push out the terms of its credit? Or perhaps more realistically, what if those terms grew at or around the rate of sales? How would that impact the dividend? Let's examine payments instrumental to the company's operation, in combination with cash flow numbers, to gauge the dividend's viability. Here's what it would have been for each of the past two quarters:
Metric |
Q3 2005* |
Q2 2005* |
---|---|---|
Operating cash flow |
$41,865 |
$40,726 |
Capital expenditures |
($7,981) |
($5,018) |
A/P and accrued liab. increase |
($14,014) |
($11,750) |
Capital lease obligation |
($90) |
($152) |
Term loan repayment |
($5,001) |
($5,833) |
ADJUSTED CASH FLOW |
$14,779 |
$17,973 |
Dividend payments made |
($12,669) |
($12,590) |
CASH REMAINING |
$2,110 |
$5,383 |
See what's happening here? There might a legitimate reason for such growth in payables, though it does seem odd. But regardless of the reason, by pushing out terms of credit, United Online is managing to fund a substantial dividend. Net out growth in payables, which seems inordinately high, and you're left with no dividend. Add even markedly slower growth in payables, and you're out of luck.
Bear in mind this equation doesn't include the impact of expensed stock options. Yeah, I know they're a non-cash charge. But options do transfer wealth from owners to employees through dilution. Keeping them in would have run cash flow negative to the tune of $727,000 in the third quarter.
Don't get me wrong. I'm not here to beat up on United Online. But I'd be remiss if I didn't point out the very real risk to the dividend. After all, this isn't Wal-Mart
Dial up related Foolishness:
- You've got the analysis. Now get the numbers.
- Yeah, these numbers are pretty good. But United Online still has a problem.
- Don't throw away that chocolate eclair! It's still good!
- Waddya think? Is United Online for real?
Does United Online's 6% dividend yield sound mouthwatering? We think so, too. Find out how to earn market-crushing returns by getting paid to invest. Take a risk-free trial to Motley Fool Income Investor today.
The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our Foolanthropy discussion board through Nov. 9. For guidelines on what makes a charity Foolish, visit www.foolanthropy.com .
Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. eBay and SBC are Motley Fool Stock Advisor picks. The Motley Fool has an ironclad disclosure policy.