As an almost side-note alongside its announcement of an HVAC business divestment, Just Energy Group (NYSE:JE) subtly let slip that it will slice its dividend by just over 40%. Dividend stock investors loathe news like this, but Just Energy Group's dividend haircut may actually give it a better look. Here's what you need to know.
More core, more cash
Just Energy Group's headline announcement was the sale of its National Home Services HVAC business to a privately held Canadian company for $505 million. Undoubtedly, this move will be met with mixed sentiment.
On one hand, the sale allows Just Energy to focus on its competitive retail business of natural gas and electricity. While HVAC has something to do with energy, National Home Services is hardly a core asset, and the intangible split focus on the two business types may have been negatively affecting Just Energy's management. It's the same reason AGL Resources (UNKNOWN:GAS.DL) sold its Tropical Shipping subsidiary two months ago for $220 million. At the time of the announcement, AGL Resources Executive Vice President and CFO Andrew Evans noted:
We have consistently noted that AGL Resources' strategic focus is on owning and operating regulated natural gas utilities and related assets. While we have been responsible stewards of Tropical Shipping for the duration of our ownership, and have worked diligently to successfully increase profitability over the last two years, we have deliberately sought a more strategic owner for these assets.
But while AGL Resources simply wants to stick with what it does best, Just Energy Group has a more pressing reason for its divestment: debt. Once the dust from the deal settles, the company expects to be able to reduce its net debt reduction to clock in around $400 million. That'll go a long way to clearing up its debt burden, which clocked in at $982 million for FY 2013.
Dividends and debt
But while Just Energy Group's sale will provide it with some much-needed cash, it'll also cut deep into earnings. Although Just Energy is known as a utility company, its HVAC subsidiary accounted for a whopping 20% of base EBITDA (earnings before interest, taxes, depreciation, and amortization) in FY 2013, and was supposed to bring in 25% of FY 2015's base EBITDA.
Accounting for the earnings loss, Just Energy calculates that its current dividend distribution would account for more than 100% of total earnings: unsustainability at its worst.
So, the company is doing what it has to do to balance its books. Following its June payout, Just Energy will move to a quarterly (versus monthly) dividend and cut its overall annual distribution by 40.5%. Commenting on the decision, Executive Chair Rebecca MacDonald noted:
This transaction will allow us to substantially reduce our debt and strengthen our balance sheet. Our lower dividend reflects a sound payout ratio on our revised cash flow guidance. These steps are consistent with the conservative strategy being pursued by management. The retailing of deregulated energy continues to show high growth across North America. Just Energy is a leader in the industry and has grown its business every year since our formation.
Foolish bottom line
Just Energy investors currently enjoy a juicy 14.3% dividend yield, but most of that magical number is the result of a tumbling stock price. After the utility revealed rough customer renewal rates in its latest quarterly report, its stock crashed through the floor.
This sale means a cut to dividend stock investors' monthly cash influx, but Just Energy's longer-term prospects are now significantly stronger. With solid footing for its financial future, investors will need to keep a close eye on next quarter's report to see whether Just Energy's operations can also pull through.
Justin Loiseau has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.