Back in February 2005, Sara Lee
Last week, Sara Lee issued full-year results. Sales fell 1% to $15.9 billion and diluted earnings fell about 20% to $0.72 per share. There were a number of reasons given for the shortfall, including nearly a dozen "significant items" related to both continuing and discontinued operations. In short, Sara Lee's businesses are stable but stagnant. And management is struggling for a clearer direction, as seen recently when it retracted annual sales targets. It's hoped the spinoff will help.
The new Hanesbrands will include Hanes clothing, Champion sportswear, Playtex, and Wonderbra. Apparel represents about 30% of total company sales, so the spinoff will leave Sara Lee as primarily a food company, with brands including Ball Park franks, Hillshire Farm, Jimmy Dean, Kiwi Shoe Polish, and Sanex skin brands.
Sara Lee has appealed to income-oriented investors, including Mathew Emmert, lead analyst for the Motley Fool Income Investor newsletter service, who picked it back in 2003. Because Sara Lee hasn't performed too well of late, it recently cut its dividend back a bit; based on the current quarterly payment, the dividend yield now stands at about 2.3%. Management's spin is that the new Sara Lee will be a "smaller, tightly focused company" after the spinoff. That may be true, but the market is clearly taking a wait-and-see approach to see if it will be a better company going forward, meaning consistent and visible increases in earnings.
With a lower dividend, are there any offsetting benefits for shareholders? There are a few, starting with the Hanesbrands spinoff. Shareholders will receive one share of Hanesbrands for every eight they hold of Sara Lee. It's hard to tell what Hanesbrands' performance will be, but if it's anywhere near another Sara Lee spinoff -- Coach
Also, Hanesbrands will be paying Sara Lee a $2.4 billion dividend in connection with the spinoff. This will saddle the new firm with additional debt, but is a clear benefit to Sara Lee holders; there has even been talk of a special dividend for shareholders, though nothing is confirmed.
Sara Lee is aiming for a dividend payout ratio of 40% to 50%, meaning it will still focus on generating income for shareholders. It's also planning to repurchase $2.5 billion to $3 billion in stock from 2006 through 2010 and to reduce debt by $1 billion next year. This speaks to the cash-generating abilities of its food operations.
The problem at Sara Lee hasn't been cash flow; it's been growth. And things aren't expected to pick up soon: Back in June, ratings agency Moody's downgraded its debt, citing softness in certain flagship brands. That's because the food industry is tough, with other giants including Kraft
There's no doubt Sara Lee is struggling to grow, but it is trying to enhance shareholder value by focusing on food and a couple of other consumer brands. At least investors are getting paid to wait -- not as much as they used to, but there is hope that growth will improve and lead to capital appreciation in the stock. At a current $16.86, the stock is at a five-year low, and one could argue that the upside potential now exceeds any further downside risk. Time will tell; in the meantime, don't forget to cash your dividend check.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.