When we last took a look at branded and private-label sugar refiner Imperial Sugar (NASDAQ:IPSU) about a year ago, we managed to muddle through a few somewhat confusing financial statements to come away with a picture of a company with the potential to be a decent, boring, cash producer -- but without the ability to reward investors for support with a dividend because of financial covenants. Yesterday, all that changed.
Imperial had to pay down debt aggressively in order to be allowed to pay a dividend before 2006, and that's just what it did. Yesterday, the company announced plans for a one-time payout -- as well as a regular quarterly dividend, its first since 1999 -- beginning in January. It got there by slashing its debt load, particularly its long-term debt. That and other payments allowed it to sign a new credit pact, which included the ability to pay a dividend as long as it maintains set liquidity levels.
So why did investors pull Imperial's shares down nearly 11% yesterday -- on 10 times normal trading volume -- following the news? Well, even a year ago we knew the company wasn't going to be much of a grower, and that was illustrated in no uncertain terms yesterday: The company managed to improve gross margins and lower operating costs for the fiscal year ended Sept. 30, but revenue from continuing operations fell.
Competition is fierce and supply plentiful, and Imperial made a conscious decision to maintain profit margins rather than rethink some of its low-end business. That market environment, combined with a significant projected rise in energy costs for 2005, will put even more pressure on Imperial's new managers -- many well-placed folks were hired in fiscal Q4 -- to control expenses and re-energize sales growth.
In short, while 2004 has been good to Imperial stockholders (a greatly improved operational picture explains why), it's easy to understand why investors greeted the company's dividend news with caution, ending a lengthy run of new highs. The bigger picture is a challenging one, and so the addition of a dividend payment only helps so much.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies mentioned in this article.
