Why Yahoo Can't Pay A Dividend

Yahoo (YHOO) was once a darling of the dot-com world. In a highly anticipated IPO in 1996, Yahoo shares opened at $24.50 per share and then soared 75 percent in the first hour of trading. By the end of 1999, YHOO shares had reached an astounding $432 per share. Now it seems that Yahoo’s days as a publicly trading company may be numbered. After spurning a $30 billion takeover bid by Microsoft (MSFT), Yahoo investors place the future of their company in the hands of former Autodesk CEO Carol Bartz. Since that hiring in January 2009 the company has done little besides sell off assets at bargain basement prices. Yahoo has been a public company for 14 years and is the 2nd most visited site in the world, but the company cannot clearly articulate who they are. Carol Bartz has failed to create a real identity for Yahoo and more importantly has failed to lay out a strategic direction for the company. Growth investors have long since fled Yahoo and it seems that speculative investors that were banking on a turnaround are headed for the exits as well. Despite signs of recovery in the ad market, Wall Street expects revenues to decline in 2010 and is only looking for a 4 percent growth next year. Rumors have been escalating that Carol Bartz may be fired and that the company is considering going private. In short, Yahoo has become an unloved stock with no compelling story to entice investors to buy their stock. Typically when a growth stock reaches this stage of its life cycle, the company initiates a dividend program. Just recently, Cisco Systems announced that they will initiate a dividend in 2011. This milestone in a company’s development tends to bring in a whole new segment of income and value investors. With nearly $3 billion in cash on their balance sheet and few growth catalysts, Yahoo would appear the perfect candidate for initiating a dividend. Unfortunately, the company has been experiencing a cash flow problem of late that would hinder their ability to pay out a regular dividend. Free cash flow is the key to supporting regular dividend payments, but last quarter Yahoo reported free cash flow fell 52 percent to $127 million. That followed a 70 percent drop in free cash flow in the first quarter. Through the first two quarters of 2010, Yahoo’s cash balances have fallen 16 percent. Yahoo’s stagnant revenues and oversized expense structure means that cash flows are likely to continue their decline. Even if Yahoo were to announce a regular dividend, as a potential investor I would question their ability to maintain anything other than a nominal dividend. Former high-flyers like Expedia (EXPE) and Starbucks (SBUX) have the cash flows to support their recently announced dividend programs. Even former dial-up provider United Online can support a high dividend yield. Unfortunately, Yahoo’s cash flow is too erratic to support a dividend right now. That’s a shame, because if Yahoo can’t generate some buying interest soon their days as a publicly traded company may be coming to an end.Disclosure: No positions... Read more