What: Shares of Avon Products (AVP) dropped 14% Thursday after credit-data company Fitch Solutions voiced concerns about the cosmetics specialist's financial condition, and warned its dividend is at risk.
So what: Specifically, Fitch noted that five-year credit-default swaps referencing Avon debt -- essentially a form of insurance should Avon default on that debt -- have widened 22% during the past month as of Wednesday to a "record wide 1,109 basis points." That easily underperformed the broader North American consumer-goods sector, where five-year credit-default swaps widened just 3%. So far this year, Fitch elaborated that credit-default swaps referencing Avon have widened 130%, marking "a steep increase in the cost of protection."
This shouldn't be terribly surprising to investors after Avon released painful third-quarter results last week, saying that foreign currencies largely propelled a 22% decline in revenue, to $1.7 billion. On a constant-currency basis, Avon's sales would have fallen a much more modest 2%. Meanwhile, Avon's adjusted net loss came in at $50 million, or $0.11 per share, and the company reduced its guidance for operating margin and free cash flow for the full year.
Now what: But arguably even worse going forward is that Avon also declared a $0.06-per-share quarterly dividend along with that report, equating to an annual payout of roughly $104 million to investors, or a yield of roughly 9% as of this writing.
At risk of stating the obvious, Fitch's latest report suggests, "As [Avon] evaluates the foreign exchange impact on cash and cash flow into 2016, the $100 million or so in dividends could be in jeopardy. While a dividend cut would be positive for creditors, it is also a signal of increased pressure on liquidity."
As it stands, even with shares of Avon down more than 70% year to date, I feel the need to reiterate my stance that investors would be wise to avoid Avon stock as its struggles continue to compound.
