Has Scotts Dug Itself a Hole?

Small-cap lawn and garden company Scotts Miracle-Gro (NYSE: SMG) takes care of its shareholders with share buybacks and annual sprinkles of dividends, and recently showered them with a hefty one-time cash dividend and Dutch tender auction for even more shares. The added debt is significant, but Scotts could easily outgrow any leverage worries.

Second-quarter results released this week continued a healthy trend of sales gains, even though bottom-line earnings were hit by higher interest expense and a refinancing charge from the $8-per-share special dividend in March and the $245 million share repurchase auction. Interest expense rose 43% compared with last year's second quarter, but operating income was nine times larger, eliminating any major liquidity concerns.

Scotts also has a very steady-eddy business of selling the well-known Miracle-Gro, Turf Builder, and Roundup brands, the last of which it licenses from seed giant Monsanto (NYSE: MON). It's also firmly established with large big-box retailers. More than 60% of its North American business stems from sales through Home Depot (NYSE: HD), Wal-Mart (NYSE: WMT), and Lowe's (NYSE: LOW). Favorable growth prospects at these giants also favor Scotts, even as their stores move abroad.

About 15% of Scotts sales are made globally, and that number grew twice as fast as the one for North America in the most recent quarter. These ideal conditions have contributed to annual double-digit sales growth over the past five years, with even stronger trends in earnings and cash flow each year.

The company's recent one-time payout and sizeable share buyback certainly benefited shareholders, but could also have been a defensive move to remain an independent firm for another 100 years. Scotts' origins date to at least 1907, and while debt is now a whopping 82% of total capital, the company has been able to increase debt and pay it down quickly, as in when it purchased Smith & Hawken back in 2004. A stable business and relationships with well-respected retailers could bring further gains.           

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Fool contributor Ryan Fuhrmann is long shares of Home Depot and Lowe's but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.