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Why I Don't Like McAfee's 33% Dividend Payment Increase

By Herve Blandin - Mar 2, 2021 at 8:15AM

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The cybersecurity specialist posted strong fourth-quarter results, but it must deal with a significant challenge.

McAfee (MCFE) posted strong fourth-quarter results last week, boosted by its consumer segment. And with its broad and updated offering, the company should keep profiting from the increasing need to protect enterprises and individuals from cybersecurity threats.

Given such encouraging results and perspectives, management boosted the dividend payment by 33%, an attractive proposition for dividend-oriented investors. Yet I don't welcome that decision, as the legacy cybersecurity specialist should first deal with its significant debt load.

Strong consumer cybersecurity business

In contrast with many cybersecurity players, McAfee has products suited for both the consumer and enterprise segments. 

Someone in hoodie using laptop

Image source: Getty Images.

Its consumer offerings provide tools that protect individuals and all types of end-user devices (from personal computers to mobile phones) against spyware, ransomware, and other cybersecurity threats. On the enterprise side, it replaced its legacy hardware-based businesses, such as network firewalls, with subscription-based endpoint protection and cloud-native software solutions.

So McAfee developed a portfolio that is poised to capture growth areas in the attractive cybersecurity market. With the digitization of enterprises and the multiplication of end-user devices, management estimated that the company's addressable market will grow at a compound annual rate of 7.9% to $41.2 billion by 2024.

And the fourth-quarter results showed strong execution. Revenue increased 14% year over year to $777 million, thanks to 23% year-over-year revenue growth in the consumer segment that represented 55% of revenue.

In particular, as individuals need more cybersecurity services as they increase their online interactions, McAfee managed to attract 668,000 net new core direct-to-consumer subscribers to its platform during the last quarter. In total, the company accumulated 18 million core direct-to-consumer subscribers last year, up more than 18% year over year.

Significant debt load

Given McAfee's solid recent results, management announced a 33% increase in the annual dividend payment using $200 million to fund the payout rather than the previous $150 million. That corresponds to a dividend yield of 2.3% as of this writing.

Yet considering the company's balance sheet and strategy, I don't like that decision. 

At the end of last year, McAfee's total debt in excess of cash and cash equivalents diminished to $3.8 billion, down from $4.5 billion one year ago, mostly thanks to the $586 million from the proceeds of its initial public offering (IPO) in October 2020.

That debt load remains significant relative to the company's operating results, though. In comparison, management highlighted $982 million of unlevered free cash flow last year, up 37% year over year. But if you deduct $268 million of interest payments, McAfee could use only $714 million of free cash flow to pay a dividend while also reducing its debt load.

Besides, management indicated it will pursue acquisitions to enhance the company's portfolio, which requires a solid financial position. Indeed, McAfee needs to keep investing to compete against innovative cybersecurity players that pursue the same strategy with stronger cash resources.

For instance, after having reinforced its balance sheet in January, the high-growth endpoint protection specialist CrowdStrike agreed to acquire Humio to leverage its platform and expand its footprint with extra monitoring capabilities. And thanks to its high profitability, the legacy cybersecurity player Check Point Software still managed to preserve $4.0 billion of cash, cash equivalents, and marketable securities (with no debt) at the end of the last quarter after having acquired multiple businesses over the last several years to beef up its cloud security capabilities. 

Looking forward

So dividend-oriented investors should temper their enthusiasm for McAfee's dividend increase announcement. The company's financial situation means the increase will reduce its ability to acquire businesses that can help it remain competitive over the long term. And given the significant debt load in such a competitive market, I don't expect any meaningful dividend increase in the medium term. Investors looking for solid regular income might want to consider these dividend stocks instead.

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