Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Nathan's Famous (NASDAQ:NATH) surged after the hot dog purveyor announced a debt offering to finance a special dividend.
So what: Specifically, Nathan's Famous today proposed an offering of senior secured notes due 2020 in the aggregate principal amount of $125 million. Nathan's will use the net proceeds of the offering to pay a special dividend of up to roughly $116 million to shareholders. The record and payment date of that dividend will be set after the closing of the offering, any remaining proceeds will be used for "general corporate purposes, including working capital."
Now what: Make no mistake: This will be a huge dividend considering Nathan's Famous' entire market capitalization currently sits at roughly $375 million. But it's also a risky move to take on so much debt in order to fund the payout; Note according to Bloomberg, Moody's gave the debt its seventh-lowest speculative-grade rating, pointing to "weak protections for investors" and "very modest" revenue and earnings from the company. As a result, Nathan's will likely need to pay as much as 10.25% annual interest on the debt.
For reference, through the first three quarters of Nathan's Famous' current fiscal year, revenue climbed 25.8% year over year to almost $79 million, while net income rose 43% to just under $10.2 million. To its credit, Nathan's famous ended its most recent quarter with no debt, but also only had $41.4 million in cash, equivalents, and marketable securities on its balance sheet.
In the end, while I can't blame the market for bidding up shares given the sheer magnitude of the offering and special dividend, to me the risks appear to far outweigh the benefits of such an offering for long-term Nathan's Famous shareholders.