Calavo Growers (CVGW -0.56%) paid an annual dividend for many years, and it was increased regularly, building a fairly impressive dividend record. Then, in late 2022, the dividend policy changed slightly. And it was changed again in early 2023 in a decidedly negative way.
The shares are down roughly 75% from peak levels in 2018, which might interest bargain hunters looking for cheap stocks. Except that the dividend changes need to be considered before income investors buy in. Yes, Calavo Growers' stock is interesting, but it now has a lot to prove on the dividend front.
Calavo Growers is an intriguing company
A little over half of Calavo's top line comes from its "grown" segment, which is mostly driven by avocados. The company also sells tomatoes and papayas. The rest of the top line is tied to its prepared foods division, which processes and packages cut fruits, vegetables, and meat. This group also makes guacamole.
The company's gross profit mix is notably different from its revenue mix. The grown segment represents nearly 70% of gross profit while the prepared foods group accounts for only about 30%. Basically, avocados are the driving force behind the business.
Although avocado prices can be volatile (in the third quarter of 2023, they were 38% below year-ago levels), Calavo Growers has benefited from a long-term trend of increasing avocado demand. The company believes that demand will continue to grow for the foreseeable future because the number of households buying avocados remains well below that of other prominent fruits, like apples and bananas.
The dividend isn't what it used to be
The big stock-price drop is largely related to a downturn in the company's earnings trends. As the chart below highlights, earnings started to fall late in the last decade and dipped deep into the red following the height of the pandemic.
That's perhaps not so surprising given the impact on eating trends that occurred due to social distancing. While financial results have begun to improve, the cash dividend payout ratio (which compares the dividend to cash flow, and not earnings) rose to unsustainable levels in 2021.
For many years, Calavo Growers paid an annual dividend as its business expanded. But the dramatic rise in the cash dividend payout ratio led the company to announce that it was switching from an annual dividend to a quarterly one in 2022. According to Steven Hollister, chairman of the board at the time, "Our move to a quarterly dividend improves our financial flexibility and aligns with common practice."
There's no question that more companies pay quarterly dividends than annual ones, so that makes sense. But the comment about financial flexibility is a bit more troubling given the spike in the cash dividend payout ratio.
Certainly, paying smaller amounts four times a year would save the company from having to squirrel up cash. But the total dividend payment didn't change, so there's only just so much benefit on the liquidity front at the end of the day. Which is why it probably shouldn't have been surprising to see the dividend cut from $0.2875 per quarter to just $0.10 in early 2023.
The cut was announced by Lee Cole, the company's onetime CEO who returned to active CEO duty in March 2023. According to the news release, "Mr. Cole has agreed to lead the Company for three years with the goal of returning the company to a position of growth and shareholder value creation."
Cutting the dividend is a quick and easy way to free up capital for other purposes. But it changes the dividend story in a big way. Basically, Calavo Growers looks like a turnaround stock right now.
Calavo seems cheap, but hold off for now
Calavo's price-to-sales ratio is roughly 0.5, well below the five-year average of around 0.9, with price-to-cash-flow and price-to-book-value also notably below their longer-term averages. (A string of losses makes the price-to-earnings ratio a less useful metric.) So it would be easy to see why bargain hunters would want to take a look at the stock now that results appear to be moving in the right direction again.
But the dividend cut needs to be considered carefully by income investors since it changes a long trend toward higher payments. Until the newly returning CEO can get the payout growing again, it is probably best for income investors to err on the side of caution here. The dividend story just isn't the same anymore.