Yes, we have no dividends. That's the song Chiquita Brands (NYSE:CQB) investors will be singing these days; the banana bunch announced it will suspend its $0.10 quarterly dividend payment.
Best known for its bananas, Chiquita is also a purveyor of salads and freshly cut produce, as well as an operator of refrigerated cargo ships used mainly to ferry its produce from Latin America to North America and Europe. But add in debt from last year's Fresh Express acquisition, a sharp decline in demand for its salads due to the recent outbreak of E. coli bacteria in spinach, and new rules regarding bananas in Europe, and Chiquita suddenly faces some rotting prospects.
The banana king paid Performance Foods Group (NASDAQ:PFGC) $855 million for its Fresh Express salads company last year, instantly making it the top banana in the bagged-salad business, with a 40% market share. But it also caused the company to incur significant SG&A costs, as well as interest expense to finance the debt it took on. Now with the E. coli outbreak -- which has killed one and sickened at least 175 people thus far -- even though Chiquita's spinach is apparently unaffected, the company anticipates greatly diminished sales and increased costs as it tries to boost marketing.
To streamline its business, Chiquita plans to sell off its Great White Fleet of 12 refrigerated cargo ships that transports approximately 70% of the company's bananas to markets in Europe and North America (the fleet gets its name from the ships' white-painted hulls that keep the fruit cooler in the hot tropical sun). It's possible it will then lease back the ships or even use third-party shippers. That's what the company has done since it added trucking routes to deliver some goods, using Ryder (NYSE:R), its logistics company, when it wanted to add capacity.
But the banana business has become more slippery of late, as the European Union dropped import quotas while also raising tariffs on the fruit coming in from Latin America. That led to a 10% decline in sales in the last quarter, and Chiquita expects sales in the third and fourth quarters -- already its weakest -- to be similarly elusive.
With rising costs, lower sales, and more debt, it probably shouldn't have come as a surprise that the company's dividend would also be put on the chopping block. Chiquita says the $17 million it will save will go toward reducing the $992 million of debt it had on the books at the end of June.
While a number of the problems Chiquita faces are unique to its business, there are a few which could spell trouble for other banana growers, like former Motley Fool Hidden Gems selection Fresh Del Monte Produce (NYSE:FDP) and privately held Dole Foods. Banana sales make up a third of Fresh Del Monte's annual sales, so higher tariffs will also cause increasing costs for it. While Chiquita's stock fell more than 14% yesterday on the news, Fresh Del Monte also declined 5%, perhaps in recognition of the widespread effects on the industry. In produce companies where bananas are a negligible factor, such as at Del Monte Foods (NYSE:DLM) and Maui Land & Pineapple (NYSE:MLP), stock prices were relatively unaffected. Bananas represent over half of Chiquita's annual sales.
When you peel back the layers of this company, it looks like it faces some rotten prospects. With past revelations of monkey business regarding protection money payments and price information leaks to competitors, Chiquita may not be ripe for every investor.
Savor this fruit cup of related Foolish articles:
- Chiquita Slips on a Banana Peel
- Chiquita Brands: Relatively More Appealing
- Rotten Banana News
- Leverage: A Slippery Banana Peel
Got a hankering for some wholesome investments? Find a delectable selection with a 30-day guest pass to Motley Fool Hidden Gems, the premier small-cap investment newsletter.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
